Pivot Point Trading Tutorial

You are going to love this lesson. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.

The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.

Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to use pivot points.

The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).

Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.

Before I go into how you calculate pivot points, I just want to point out that I have put an online calculator and a really neat desktop version that you can download for free HERE

If you would rather work the pivot points out by yourself, the formula I use is below:

Resistance 3 = High + 2*(Pivot – Low)
Resistance 2 = Pivot + (R1 – S1)
Resistance 1 = 2 * Pivot – Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot – High
Support 2 = Pivot – (R1 – S1)
Support 3 = Low – 2*(High – Pivot)

As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.

If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.

The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.

Unfortunately life is not that simple and we have to deal with each trading day the best way we can.

I have picked a day at random from last week and what follows are some ideas on how you could have traded that day using pivot points.

On the 12th August 04 the Euro/Dollar (EUR/USD) had the following:
High – 1.2297
Low – 1.2213
Close – 1.2249

This gave us:

Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
Support 1 = 1.2209
Support 2 = 1.2169
Support 3 = 1.2125

Have a look at the 5 minute chart below

The green line is the pivot point. The blue lines are resistance levels R1,R2 and R3. The red lines are support levels S1,S2 and S3.

There are loads of ways to trade this day using pivot points but I shall walk you through a few of them and discuss why some are good in certain situations and why some are bad.

The Breakout Trade

At the beginning of the day we were below the pivot point, so our bias is for short trades. A channel formed so you would be looking for a break out of the channel, preferably to the downside. In this type of trade you would have your sell entry order just below the lower channel line with a stop order just above the upper channel line and a target of S1. The problem on this day was that, S1 was very close to the breakout level and there was just not enough meat in the trade (13 pips). This is a good entry technique for you. Just because it was not suitable this day, does not mean it will not be suitable the next day.

The Pullback Trade

This is one of my favorite set ups. The market passes through S1 and then pulls back. An entry order is placed below support, which in this case was the most recent low before the pullback. A stop is then placed above the pullback (the most recent high – peak) and a target set for S2. The problem again, on this day was that the target of S2 was to close, and the market never took out the previous support, which tells us that, the market sentiment is beginning to change.

Breakout of Resistance

As the day progressed, the market started heading back up to S1 and formed a channel (congestion area). This is another good set up for a trade. An entry order is placed just above the upper channel line, with a stop just below the lower channel line and the first target would be the pivot line. If you where trading more than one position, then you would close out half your position as the market approaches the pivot line, tighten your stop and then watch market action at that level. As it happened, the market never stopped and your second target then became R1. This was also easily achieved and I would have closed out the rest of the position at that level.

Advanced

As I mentioned earlier, there are lots of ways to trade with pivot points. A more advanced method is to use the cross of two moving averages as a confirmation of a breakout. You can even use combinations of indicators to help you make a decision. It might be the cross of two averages and also MACD must be in buy mode. Mess around with a few of your favorite indicators but remember the signal is a break of a level and the indicators are just confirmation.

We haven’t even got into patterns around pivot levels or failures but that is not the point of this lesson. I just want to introduce another possible way for you to trade.

Good Trading

Best Regards
Mark McRae

Day Trading using Pivot Point Bounce

From Adam Milton,
Your Guide to Day Trading.

Introduction

The pivot point bounce trading system uses a short term timeframe and the standard daily pivot points, and trades the price moving toward, and then bouncing off of any of the full or half way pivot points.

Pivot points are support and resistance levels that are calculated using the open, high, low, and close of the previous trading day. The pivot points include the pivot point itself, six full support and resistance points, and four half way support and resistance points, and are collectively referred to as the pivot points. When the price approaches a pivot point (especially for the first time in each direction), it will have a tendancy to reverse, and it is this reversal that is used by the pivot point bounce trading system.

The default trade uses a 1 to 5 minute OHLC (Open, High, Low, and Close) bar chart, and the daily pivot points.

1. Introduction
2. Open a Chart
3. Add the Pivot Points
4. Wait for the Price to Move Towards a Pivot Point
5. Wait for the Price to Touch the Pivot Point
6. Enter your Trade
7. Wait for your Trade to Exit
8. Repeat the Trade
9. Trading Reports

Open a Chart

Open a 1 minute OHLC (Open, High, Low, and Close) bar chart of your market.

Add the Pivot Points

Add the daily pivot points.

Wait for the Price to Move Towards a Pivot Point

Watch the market, and wait until the price is moving toward a pivot point. For a long trade, the price bars should be making new lows as they move towards the pivot point, and for a short trade the price bars should be making new highs as they move towards the pivot point.

Wait for the Price to Touch the Pivot Point

Wait for the price to touch the pivot point, which happens when the price trades at the pivot point price.

Enter your Trade

Enter your trade when the high (or low) of the first price bar that fails to make a new low (or high) is broken. The following list shows the steps required for both long and short entries :

Long Trade

1. Price bar touches the pivot point
2. Subsequent price bar fails to make a new low
3. Subsequent price bar breaks the high of the previous price bar

Short Trade

1. Price bar touches the pivot point
2. Subsequent price bar fails to make a new high
3. Subsequent price bar breaks the low of the previous price bar

In the trade shown on the chart below, the bar that failed to make a new high is shown in white. The entry is when the subsequent price bar breaks the low of the entry bar, which is at 7217.0, with a target of 7207.0, and a default stop loss of 7222.0.

The stop loss can be adjusted to use either the pivot point as the stop loss, or the high (or low) of the entry bar as the stop loss, depending upon the market being traded.

There is no default order type for the pivot point bounce trade entry, but for the DAX the recommendation is a limit order.

As soon as your entry order has been filled, make sure that your trading software has placed your target and stop loss orders, or place them manually if necessary. There is no default order type for either the target or stop loss, but for the DAX (and usually for all markets), the recommendation is a limit order for the target, and a stop order for the stop loss.

Wait for your Trade to Exit

Wait for the price to trade at your target or at your stop loss, and for either your target or stop loss order to get filled. The pivot point bounce trade can take anywhere from a few minutes to a couple of hours to reach your target or stop loss. Depending upon the market being traded, the target could be adjusted to be the next pivot point, and the stop loss could be adjusted to break even at a suitable time.

The targets that are shown on the chart are at 7212.0 (10 ticks), and 7207.0 (20 ticks), both of which were filled by this trade.

If your target order has been filled, then your trade has been a winning trade. If your stop loss order has been filled, then your trade has been a losing trade.

Repeat the Trade

Repeat the trade from step 4, as many times as necessary, until either your daily profit target is reached, or your market is no longer active.

Trading Reports

The pivot point bounce trading system will be reported in the blog, and you can use these trading reports to follow the pivot point bounce trade, and also to compare it to your own trading.

If you have any questions about the pivot point bounce trading system, or would like to see additional charts of the trading system, leave a comment in the blog, and I will be glad to provide additional information.