Pivot Points in the Trading

The main goal of using pivot points is the determination of the most important support and resistance levels. Moreover, with the help of it, trader analyses the market mood in the time of the lateral movement, as well as in the period of the strong trend. It is considered, that when the price is repelled from the pivot point, then there will be the rollback from the previous pivot point in the near future. If the price overcomes the point, then it will continue the movement, at least, till the next pivot point.


Types of the points

There are several main methods of calculating the pivot points. Each of them has its own features, restrictions and followers. Let’s introduce them in the list:
  • Standard system;
  • Woodie’s pivot points;
  • Camarilla pivot points;
  • Murrey math;
  • Fibonacci pivot points;
  • Hourly price levels.

Standard system

This method is the most popular among the traders because of its simplicity and efficiency. Firstly, in this system, with the help of simple arithmetic average of Previous High, Previous Low and Close price of the previous trading session, the base (main) pivot point is calculated. Then, based on it, the main resistance levels (R) and support (S) are being calculated. Usually, to calculate the daily pivot point, the data on the moment of New York session closing is usually used (16:00 EST):
  • Pivot Point = (Previous High + Previous Low + Previous Close) / 3;
  • Resistance Level 1 = (2 × Pivot Point) – Previous Low;
  • Resistance Level 2 = Pivot Point + (Previous High – Previous Low);
  • Resistance Level 3 = Previous High + 2 × (Pivot Point – Previous Low);
  • Support Level 1 = (2 × Pivot Point) – Previous High;
  • Support Level 2 = Pivot Point – (Previous High – Previous Low);
  • Support Level 3 = Previous Low – 2 × (Previous High – Pivot Point).

This system is the cornerstone for all different pivot point types. At the same time, because of it's mathematic calculation, sometimes it misses important resistance and support points.

Woodie’s pivot points

In difference to another methods, which use only 3 options – Previous High, Previous Low and Previous Close, Woodie’s pivot points take into consideration also Previous Open. Followers of this method think that extreme points often show traders’ "caprices", so they are less important compared to the Previous Close and Previous Open. However, despite this advantage and the simplicity of the use, Woodie’s pivot points are not so popular, as, for example, Fibonacci, Camarilla or Murrey pivot points. Moreover, this method doesn’t propose any strategy, compared with another, more fastidious calculations and this fact makes this method less useful for professional traders.

Camarilla pivot points

More advanced indicator, based on the Pivot Points. Each point is the signal to some activity, so it’s different from other main lines.
  • H5 = (Previous High / Previous Low) × Previous Close;
  • H4 = Previous Close + 1.5 × (Previous High – Previous Low);
  • H3 = Previous Close + 1.25 × (Previous High – Previous Low);
  • L3 = Previous Close – 1.25 × (Previous High – Previous Low);
  • L4 = Previous Close – 1.5 × (Previous High – Previous Low);
  • L5 = Previous Close – (H5 – Previous Close).

The range L3-H3 limits the price inner hallway. If the price repelled from this borders and often reaches the opposite side. If the quote breaks the level L4 or H4, then the trading goes on trend and, respectively, take profit is placed near the points L5 or H5 respectively. In this case lines H3 and L3 serve for placing the stops.

Murrey math

This indicator consists of 9 equidistant lines, main from which are basis point 4/4 and outside resistant and support points (line 8/8 and line 0/8 respectively). Each point assumes its own acting strategy. Based on the Gann theory, this indicator is rather difficult to understand and to use. But a definite plus is versatility and big efficiency on the cyclic market.

Fibonacci pivot points

It’s the extension of the standard system on the pivot points, in which for more accurate calculations differential of Previous High and Previous Low is multiplied on Fibonacci coefficient.
  • Pivot Point = (Previous High + Previous Low + Previous Close) / 3;
  • S1 = Pivot Point – 0.382 × (Previous High – Previous Low);
  • S2 = Pivot Point – 0.618 × (Previous High – Previous Low);
  • S3 = Pivot Point – 1 × (Previous High – Previous Low);
  • R1 = Pivot Point + 0.382 × (Previous High – Previous Low);
  • R2 = Pivot Point + 0.618 × (Previous High – Previous Low);
  • R3 = Pivot Point + 1 × (Previous High – Previous Low).

Hourly price levels

Is used for inside-day trading, especially for scalping. Calculating of these points is the same, as in the standard form, only difference – is that for calculating we use High, Low and Close of the previous hour. Because of specialization on the little timeframes, this pivot point is not useful for medium and long-term trading.

by JustMarkets, 2017.11.17

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