What are Pivot Points?
Pivot Points are significant support and resistance levels that are used by the price action traders to determine the potential trades over different time frames (daily pivot points, weekly pivot points, monthly pivot points, etc.).
Pivot points are calculated using high, low and closing prices of the particular trading day, week, month, etc., depending upon the period for which the pivot points are being calculated. Example:- for daily pivot points last day trading range is considered, for weekly pivot points last week’s trading range is taken for calculation, and so on.
Daily pivot points remain the same for that particular day, weekly pivot points remain the same for that whole particular week and do not change until the weekends and the new ones are calculated and so on.
It is interesting to know that the different pivot points (daily, weekly, monthly, etc.) will change on your chart automatically once you adjust the candlesticks time frame:-
1 min to 15 min time frame – Daily Pivot Points
30 mins to 4 hours time frame – Weekly Pivot Points
Daily Charts – Monthly Pivot Points
Do we need to learn the calculation of Pivot Points?
Pivot Points are automatically mapped on your chart so rather than focusing on the calculation of the several types of pivot points (Standard Pivot Points, Fibonacci Pivot, camarilla pivots points, etc. ), I will recommend focusing on learning how to use them and finding out the type of pivot points which work for you the best and according develop a price action trading strategy.
Is it a Technical Indicator?
Yes, it is a technical indicator but unlike other indicators like MACD, Bollinger bands, etc. it is a leading indicator. We consider it a leading indicator as it predicts the potential turning points on the chart and are pre-calculated, hence the traders can plan their entry/exit levels in advance.
If Yes, What’s its role in Price Action Trading?
The Pivot Points sets the base for price action. The middle level is marked as P and a move above this level gives a bullish signal and a move below this level gives a bearish signal. Also, the other levels (R1/R2/S1/S2..) provide the traders with crucial support and resistance levels on the chart.
As discussed in my previous blogs and videos, support & resistance is a very crucial part of price action trading. Support & Resistance can be manually found and plotted on the charts as discussed earlier or it can be automatically generated using pivot points. The trick is to find what works for you the best.
How can automatically calculated levels always work?
Pivot Points are a tool that helps traders to point out the levels that have an interest of several other traders as well and thus it is likely that orders will flow more at these levels.
Unlike manually plotted support & resistance, pivot points will be the same for all the traders, and therefore the chances of it becoming relevant increases.
Thus giving pivot points a self-fulfilling prophecy i.e. when several traders are planning their trade (placing stop loss/targets ) using these points, it is quite natural that the market will turn or halt for a while whenever these levels are reached.
Pivot Points are used only for day trading?
Pivot Points are used mostly by the intraday traders but it is not exclusively for them, several other traders who do swing trading (holding period between few days to few weeks) or short term trading with a holding period of few months also rely on pivot points for taking their positions, but for that, they prefer weekly or monthly pivot points.
Types of Pivot Points?
There are five major types of Pivot Points – Standard Pivot Points, Woodie’s Pivot Points, Camarilla Pivot Points, Fibonacci Pivot Points, and Demark Pivot Points.
All pivot points use relevant trading range’s high, low, and close but the calculation formula is different for different pivot points.
The most commonly used is standard pivot points but each type has its own fan following in the market and hence a trader can freely choose any other pivot points which suit his trading style the best. For example:- I take my intraday trades using camarilla pivots.
Can Trade only on the basis of Pivot Points?
I would suggest developing a price action trading strategy using pivot points as it is important to confirm Pivot Point signals with other price action signals. For example:- R3 (a pivot point) which coincides with 55EMA will be a strong resistance and a bearish candlestick pattern formed at this level will signal to enter a short position or closing a long position.
By CA Saksham Agarwal; connect on Linkedin