# Pivot Point

Published: 22 July 2020 by Andrew

**Welcome to our complete guide to trading with Pivot Point.** Very often when you hear a technical analyst talking, you hear him mentioning **supports** and **resistances** without any graphic feedback. Even if you try to do an analysis to find these price levels, you may not be able to identify them.

When the technical analyst speaks of levels that cannot be identified through the observation of prices, most likely he **refers to the Pivot Points**. It is one of the “operational tricks” used by analysts to **identify the fundamental points of support and resistance of the price.**

Markets have much more to say than what you see from just a simple price graph, that’s why Pivot Points are so important. They are like support and resistance levels also valid for **subsequent sessions.**

The Pivot Point is valid because it represent **useful projections** even for what has not yet occurred on the markets. In Trading sector, where the analysis work is all based on “forecast”, such a tool like this certainly** cannot miss** in the trading “arsenal” of any financial negotiator.

So, don’t miss our guide to Pivot Point; with the help of this tool,** you can learn to predict price movements in advance of what the market shows**, thus setting up winning trading operations.

Before starting, we would like to remember that there is the possibility of** trading automatically**, for example, thanks to the **eToro** platform, that allows you to **automatically copy what the most experienced traders do.**

In practice, thanks to eToro, even a **beginner** can obtain the **same results** as an expert professional trader (starting from day one). Also, if you want to learn to trade, you have the opportunity to do so by **observing live what the best experts in the world do.**

It is no coincidence that many beginners sign up for eToro and use it successfully to improve: **you can sign up for free on eToro by clicking here. **

Index

## Pivot Point: why are they used?

**Are you still wondering why to use Pivot Points in your trading practice?** The fundamental aspect for trading is having **analytical skills.** Without a good technical and fundamental analysis it is impossible to understand **how the prices of the markets move** and what the intentions of buyers and sellers are.

**Pivot Points are important because many types of trading strategies can be implemented.** The market techniques used by professionals have an extraordinary effectiveness especially when they are based on **data** that come from trading indicators such as Pivot Points.

Thanks to the **countless market operations** successfully closed with the indications coming from the Pivot Points, millions of traders all over the world chose to add this indicator among their favorites in the **negotiation phase.** It is the results that speak for this indicator, there is nothing more concrete than the results for deciding which **strategy** to use during the** investment phase.**

**Trading on assets and financial markets is a serious matter.** You cannot start to operate in a trading platform without knowing which approach you intend to use. Well, before pressing that green button with the word “buy” or the red one with “sell” on it, you must have a clear idea of how the market will move: **up or down.**

**With Pivot Points, this is exactly what you can understand.** Thanks to their support and resistance, **price fluctuations become much easier to interpret.** Whoever is convinced to negotiate without the help of similar instruments is not a trader, but only a gambler.

## Pivot Point: how they work?

They are called “Pivot Points”, where “Pivot” refers to “rotation” because the “point” we are talking about is the one where there is a **change in the market trend.**

Thanks to simple calculations, a **Pivot Point can easily identify the rotation points.** So, understanding which decision to make for a winning investment is much simpler.

The calculations concern the monitoring of the classic price indicators: **what are they?**

- Maximum
- Minimum
- Opening level
- Closing level

With these 4 data, we can understand much more **about market trends.** Analysts derive from the calculations all the possible cornerstones of the market around which **new levels of support and resistance** can form. The points in question are the Pivot Points.

These special and effective points can be used on a **daily basis for your investment operations**. There is no longer anyone who can question they effectiveness and precision in interpreting what is happening on a market.

All it takes is to calculate what happened the day **before** to understand what will happen the **next day.**

## Pivot Points as supports and resistances

In another article on OnlineTradingCourse.net we deepened the concept of “Supports and Resistances”. To understand how Pivot Point works, let’s refresh the definition of this **graphic indicator**, since the two concepts are really very close.

**With supports and resistances it is possible to frame the movements of the price in very precise patterns** to obtain indications on the points where to enter and exit the market. In particular, we define:

**Support:**support is a certain price share on which the**downward**trend in prices tends to stop.**Resistance:**resistance is a certain price share on which the**upward**trend in prices tends to stop.

The only difference between Pivot Point and Support and Resistance is the fact that the former are calculated based on the **price data for the previous day** and will be valid during the **following trading day.**

The latter, on the other hand, are tracked on **price movements that have already taken place** and are used to understand in the **future** whether the same price levels will be respected or will be overcome by** new conditions** created on the markets.

**Read also: Supports and Resistances**

### Calculate the Pivot Point

As we have mentioned, Pivot Points must be calculated on the basis of **maximums and minimums and price opening and closings.** Next, let’s explain how calculations are made for Pivot Points, it is not complex mathematical calculations, but the good news is that novice traders can also avoid doing them.

The online trading platforms available today, **are organized to carry out all the necessary calculations in place of the users.** Just go to the menu of technical indicators and select Pivot Point, once chosen, it will be displayed **directly on the graph** and you will notice that the price seems to be moving in compliance with these market levels.

As you can see in the image above, the price seems to perfectly **respect the presence of Pivot Points.** In this image the colors of the points are those of the horizontal lines which form as many support and resistances for the price. The colors are:

- Pink
- Yellow
- Light Blue
- Red
- Blue

The candlestick graph moves by precisely **observing the red Pivot Point.** In this case, that point support the price, which cannot move further downwards.

When support **breaks**, the market seems to start a **bearish** **trend**, but this signal is not confirmed, rather a bullish explosion occurs.

The price again exceeds the red pivot point from the **bottom to the top** and this bullish breakout was so **strong** that it managed to run upwards until it also **broke the subsequent resistance** (the blue pivot point).

For completeness, we report the calculation formulas of the **6 main Pivot Points:**

- Maximum Price (H);
- Minimum Price (L);
- Closing Price (C);
- The average price (Average Price = AP) is calculated with this formula: AP = (H + L + C) / 3

### Formulas for calculating Pivot Points:

1° Support Pivot: S 1 = (2 * AP) – H

1° Resistance Pivot: R 1 = (2 * AP) – L

2° Support Pivot: S 2 = AP – (R1 – S1)

2° Resistance Pivot: R 2 = (AP – S1) + R1

3° Support Pivot: S 3 = S 2 – (Maximum – Minimum)

3° Resistance Pivot: R 3 = R 2 + (Maximum – Minimum)

The total of Pivot Points is 6, but sometimes the trading platforms only show 5. This indicator is special because **it creates a “cage” around the price**, the trader just needs to be ready enough to take advantage of the trading signals whenever they show up.

**There are no certainties on the financial markets.** There are no indicators that can give operational signals always valid in 100% of the cases. However, on a statistical basis, **it seems that the pivot points are respected rather faithfully by the prices.**

Sometimes, the analyst themselves can’t explain why, yet every time, this sort of magic seems to repeat itself. Be careful, however, as we have already seen previously, **even pivot points can sometimes lead to false signals**, such as that bearish trend which then did not come true that we saw in the image before.

## Pivot Point and the Fibonacci method

**One of the methods for calculating Pivot Points is linked to Fibonacci.** The great mathematician from Pisa, considered one of the greatest of all time, has left us some **formulas** that scholars have found perfectly **adaptable** to the calculation of a typology of Pivot Point, for many even more precise.

The Fibonacci method to derive the rotation points is among the most famous of all online trading. It is an equation, conceived by the Italian mathematician, that allows to **find faithful support and resistance points that manage to indicate in which direction the market price of an asset could move.**

The signals, deriving from the Fibonacci Pivot Points, are easily readable:

- In the event that the
**overcoming**of a Fibonacci support level occurs, a**Short position must be opened.**On the other hand, if a**rebound**in the price should occur on a medium,**go Long.** - Otherwise, when a
**rebound**occurs on Fibonacci**resistance**, it is necessary to open a**Short position**, instead, if the**overcoming**occurs, it is necessary to open a**Long position.**

The calculation formula, for those wishing to operate manually, is the following:

- R3 = Pivot + 1.000 * (H – L)
- R2 = Pivot + 0.618 * (H – L)
- R1 = Pivot + 0.382 * (H – L) Pivot = (H + L + C) / 3
- S1 = Pivot – 0.382 * (H – L)
- S2 = Pivot – 0.618 * (H – L)
- S3 = Pivot – 1.000 * (H – L)

## Pivot Point Trading Signals

As we have already mentioned, the main reason for using Pivot Points is to obtain **valid trading signals**, thanks to their use. Let’s see from an operational point of view, how the market shares, indicated by the Pivot Points, **can be used to make an investment.**

Once the indicator is selected, on the trading platform, it will go to include the price. Whichever direction it moves, **the market will always encounter a Pivot Point ready to act as support or resistance.** All you have to do, at that point, is to follow some simple operating rules.

Let’s see the two types of signals generated by the buy or sell Pivot Points:

### 1 – Long market entry sign

A “Long” entry sign indicates that you must enter the market by **opening a Buy position.** As you can see from the image above, the penultimate Pivot Point has been punctured from the bottom to the top by the **price**.

This is a clear **bullish** **sign**, because it works exactly like when a resistance level breaks from the bottom up. The market volume **increases** and buyers gain more **strength** in the market.

This is how the price embarks on a** upward trend** that not surprisingly lasts until the next Pivot Point of resistance. There, the race to the top of the price stops and the market seeks **new points of balance.** The position must be closed pending a new trading opportunity.

### 2 – Short market signal

From the image above, however, we can derive a **bearish** market signal. This time the signal does not occur with a breakout, but it is simply a** rebound on resistance**. In this case, the resistance is represented by the** highest Pivot Point.**

The price attempts a strong rise, reaching the **bullish** resistance. At that point, the forces of the buyers on the market have failed and the price does not even touch the resistance that already **collapses** downwards.

This is an excellent **bearish signal** to be exploited until the price, decreasing, reaches the **lower support**, it is the support Pivot Point n°2. **Here, the market seeks a new level of balance by going sideways.**

### Pivot Point: overbought and oversold

Finally, we remember that Pivot Points can also report situations of **overbought** and **oversold** on the market. Precisely for this, very often, the indicator is used together with the **RSI Oscillator,** known precisely for being the main indicator of overbought and oversold.

**But, how can we distinguish when the market is in these phases of excess?** It is actually very simple. Just remember that the most distant and external Pivot Points are: **resistance 2 and 3 and support 2 and 3.** In general, the points S 1 and R 1 can be considered classic breakout or market** inversion points**, but be careful, because the other points also have pivotal information.

**Read also: ADX**

## Operating Indications for Pivot Points

Let’s now offer some practical tips for using Pivot Points when **investing on the market.** After explaining what are the bullish and bearish operating signals to use, there is a need for other measures to get the **market operations to fruition.**

In particular, it is necessary to choose well **which market to operate** with Pivot Points. In reality, like any other indicator, even Pivot Points, if used properly in the analysis phase, can be useful on any market and for **any investment strategy.**

However, the experience and results of many traders seem to suggest that one of the **best markets to use them is Forex.** Here, the **price fluctuations** are particularly faithful to what are the key points identified, thanks to the Pivot Points.

Perhaps, it is because a huge amount of **Forex investors use the indicator** and for this reason **the market always seems to take it into account.** Maybe there is something magical about Fibonacci and its equations, hard to say. But, one thing is for sure, **Forex always reacts very well at the Pivot Points.**

## Pivot Point and Money Management

Those who use financial instruments to operate on the markets must, not only try to adopt effective strategies, but also **take care of how they use the available capital to distribute it intelligently.**

Although the trading signals, generated by the Pivot Points, prove to be reliable in most cases, the most prudent trader must try to **distribute his trading capital on multiple operations** to safeguard it and multiply the chances of profit.

Our advice is to use a **maximum of 2-3%** of the trading capital available on each **individual transaction**. A well **calculated Stop Loss** can be set exactly a 3% share of the available capital, in this way, it is guaranteed that no major losses can occur.

**Read also: MACD**

## Learn Online Trading

We already talked about the great opportunity to use the **eToro platform** and its social trading to learn online trading by **copying the best traders in the world.**

For those who prefer the traditional method (study and guide) we recommend the **free guide offered by the ForexTB broker.**

**It is one of the best online trading guides available** in multiple languages and has hundreds of thousands of downloads in a few months.

**Why so successful?** Because it is:

**FREE**, while other trading courses are paid and can have quite high costs**Really complete**, all the topics are covered. Most of the other paid courses not only are very incomplete, but often refer to the purchase of other courses, even more expensive courses, to complete the training**Easy to read**, unfortunately many paid courses are full of technical terms that a beginner cannot understand…**Practice oriented:**it does not waste time with theory, but explains exactly what you need to do to make money with online trading

**You can download the ForexTB course for free by clicking here!****Read also our full review on ForexTB**

## Pivot Point Conclusions

Having a **trading strategy**, on the financial markets, is **fundamental**, choosing that is based on Pivot Points can be en even more **successful choice.**

**Few trading indicators have the same operational effectiveness as the market Pivot Points.** These are references that not only investors tend to follow, but the mass market psychology itself seems to respect them.

Learn how to use and implement them in your market strategies. The satisfactions that await you are great.

**What are Pivot Points?**

Also called Supports and Resistances, indicate crucial points in the graph where the price tends to congest before having a clear directionality.

**What are Pivot Points for?**

Their usefulness is to identify price levels that act as supports or resistance, in order to have clear operational indications.

**Does the Pivot Point strategy work?**

The percentage level of the indications provided by the Pivot Points is high enough that there are many Traders who use this system to operate on the markets.

**On which platforms are Pivot Points available?**

Since they are price levels, they can be tracked in any Platform, from the ForexTB metatrader to the eToro webtrader.