How to Use the Pivot Points Indicator

The Pivot Points indicator is a popular tool used by traders to identify potential support and resistance levels in the market. It is based on the concept of a central pivot point, which is calculated using the previous period's high, low, and close prices. This central point, along with several support and resistance levels derived from it, can help traders make more informed decisions about entry and exit points. Here’s an in-depth guide on how to effectively use the Pivot Points indicator in your trading strategy.

1. Understanding Pivot Points

Pivot Points are calculated using the formula:

$\text{Pivot Point}\left(PP\right)=\frac{\text{High}+\text{Low}+\text{Close}}{3}$Pivot Point(PP)=3High+Low+Close​

From this central pivot point, several support and resistance levels are derived:

• Support 1 (S1): $PP\times 2-\text{High}$PP×2−High
• Resistance 1 (R1): $PP\times 2-\text{Low}$PP×2−Low
• Support 2 (S2): $PP-(\text{High}-\text{Low})$PP−(High−Low)
• Resistance 2 (R2): $PP+(\text{High}-\text{Low})$PP+(High−Low)
• Support 3 (S3): $\text{Low}-2\times (\text{High}-PP)$Low−2×(High−PP)
• Resistance 3 (R3): $\text{High}+2\times (PP-\text{Low})$High+2×(PP−Low)

2. Setting Up Pivot Points on Your Chart

To use Pivot Points effectively, follow these steps:

• Choose Your Time Frame: Pivot Points can be calculated for different time frames such as daily, weekly, or monthly. The choice depends on your trading style (day trading, swing trading, etc.).
• Calculate the Pivot Points: Use the formulas provided above to calculate the central pivot point and the corresponding support and resistance levels for your chosen time frame.
• Plot on Your Chart: Input these levels onto your chart. Most charting software includes an automatic Pivot Points feature, but manual plotting can offer more flexibility.

3. Using Pivot Points in Trading

Pivot Points can be used in several ways to enhance your trading strategy:

• Support and Resistance: Use the Pivot Point as a central level around which the market is likely to oscillate. The support and resistance levels derived from the Pivot Point can help identify potential areas for price reversals or breakouts.
• Trend Reversals: If the price is above the Pivot Point, it is considered bullish; if it is below, it is bearish. Look for potential reversals or continuations as the price approaches the support and resistance levels.
• Entry and Exit Points: Traders often use the Pivot Point to determine potential entry and exit points. For example, a price bounce off a support level might be used as an entry point, while a price hit on a resistance level might signal a potential exit.

4. Combining Pivot Points with Other Indicators

For more accurate trading signals, consider combining Pivot Points with other technical indicators:

• Moving Averages: Moving averages can help confirm the trend direction indicated by the Pivot Points.
• RSI (Relative Strength Index): RSI can be used to identify overbought or oversold conditions, which can complement the support and resistance levels identified by Pivot Points.
• MACD (Moving Average Convergence Divergence): MACD can provide additional confirmation for buy or sell signals generated by the Pivot Points.

5. Practical Tips and Considerations

• Check Different Time Frames: Different time frames can provide varying perspectives. For example, a daily Pivot Point might be useful for short-term trading, while a weekly Pivot Point might offer insights for longer-term trades.
• Backtest Your Strategy: Before using Pivot Points in live trading, backtest your strategy on historical data to assess its effectiveness.
• Be Aware of Market Conditions: Pivot Points are not foolproof. Market conditions, news events, and economic indicators can impact the reliability of Pivot Points. Always consider the broader market context.

6. Examples of Pivot Points in Action

Here are some practical examples of how Pivot Points can be applied:

• Daily Trading Example: A trader calculates daily Pivot Points and notices the price is hovering near the R1 level. They might decide to place a sell order with a stop loss above R1 and a take profit near the next resistance level.
• Weekly Trading Example: A trader uses weekly Pivot Points and observes that the price is consistently bouncing off the S2 level. They might view this as a buying opportunity with a target near the R1 level.

7. Conclusion

The Pivot Points indicator is a valuable tool for traders seeking to identify key levels of support and resistance. By understanding how to calculate and use Pivot Points effectively, traders can enhance their ability to make informed decisions and improve their trading performance. Remember to combine Pivot Points with other indicators and consider the overall market context to develop a robust trading strategy.