How To Trade Using Pivot Points.

Breakout Trades:

The pivot point should be the first place you look at to enter a trade, since it is the primary support/resistance level. The biggest price movements usually occur at the price of the pivot point.

Only when price reaches the pivot point will you be able to determine whether to go long or short, and set your profit targets and stops. Generally, if prices are above the pivot it’s considered bullish, and if they are below it’s considered bearish.

Let’s say the price is hovering around the pivot point and closes below it so you decide to go short. Your stop loss would be above PP and your initial profit target would be at S1.

However, if you see prices continue to fall below S1, instead of cashing out at S1, you can move your existing stop-loss order just above S1 and watch carefully. Typically, S2 will be the expected lowest point of the trading day and should be your ultimate profit objective.

The converse applies during an uptrend. If price closed above PP, you would enter a long position, set a stop loss below PP and use the R1 and R2 levels as your profit objectives.













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.

Understanding Pivot Points Using Charts.

Generally speaking, the pivot point is seen as the primary support or resistance level. The following chart is a 5 minute chart, where:

The green line is the pivot point (P).

The red lines are resistance levels (R1, R2, R3).

The blue lines are support levels (S1, S2, S3).

Using Pivot Points In Trading.

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.

Daily pivot points give a structure to each new trading day in the currency market. With these values you can use traditional support and resistance techniques to enter and exit trades. But before I get to the strategy, I'll show you how to calculate pivot values.

Pivot Point (PP) = (High + Low + Close) / 3
Resistance 1 (R1) = (2 x Pivot Point) - Low
Support 1 (S1) = (2 x Pivot Point) - High
Resistance 2 (R2) = Pivot Point + (Resistance 1 - Support 1)
Support 2 (S2) = Pivot Point - (Resistance 1 - Support 1)

(Pivot values for several different currency pairs are posted on the TradingMarkets web site every day.)

The pivot values are plotted as horizontal levels which, in turn, serve as support and resistance. The pivot point itself can be thought of as the day's mid-point, or fulcrum. It's where the buyers and sellers meet to determine the day's trend in a currency pair. The support and resistance levels that are plotted around the pivot point are just that: potential support and resistance.

A daily pivot point (in green), S2, S1, R1, and R2 values are plotted on the chart below of the EUR/USD FX future. The chart is a 5-minute interval. Notice how the Euro broke above the pivot point early in the day, and then proceeded to trade up to R1, where it met resistance and gyrated for the rest of the day. There are many sites providing facilities to calculate pivot points, like the following site:

http://www.earnforex.com/pivot_points_calculator.php