Professional traders use pivot points to identify potentially key support and resistance levels. A pivot point and its support/resistance levels are areas at which price is expected to react.
Pivot points are calculated from the last period’s information. For example, in daily pivots, the data from the previous day is used to calculate the next day’s pivot points.
To calculate weekly pivots the data from the previous week is used to calculate the next week’s pivots and the same for monthly pivots.
Daily, weekly, and monthly are the main 3 periods that traders use to calculate their pivot points.
The pivot points themselves are laid out in such a way so as to have a main central pivot and below that there are 3 main support pivots whilst above the main central pivot there are 3 main resistance pivots
The general idea is that if price is above the main central daily pivot the bias of the market is such that price will find resistance at one of the Resistance levels, and come back down toward the main central pivot.
And if price is below the main central pivot, the expectation is that price will find support at one of the support pivots and make its way back up to the main central daily pivot.
The area above the main central pivot is called the sell zone, whilst the area below the main daily pivot is called the buy zone.
Below is an example of how these pivot points are projected onto a price chart:
The pivots that I have used in this example are daily pivots, but the concepts are the same for all pivot points.
You can see that above the main central daily pivot there are 3 green resistance lines, this area is known as the sell zone and the sell zone starts at the central daily pivot.
Below the main central daily pivot there are 3 red support lines, this area is known as the buy zone and conversely the buy zone also starts at the central daily pivot.
Again it is not wise to just trade from these levels based on this information alone, but if you have a confluence of other factors in favour of the trade such as higher timeframe market flow or a bearish price action, and on top of this directional confluence you have a confluence of other recognized levels of support and resistance on or around a pivot point that you are thinking of trading from this can be considered a very high odds trade indeed.
Let’s take a look at such a trade:
In this example we have higher timeframe market flow down, we also have price action giving very bearish signals (lower highs and lows), and finally we have a confluence of resistance including the central pivot and a 50% Fibonacci retracement. As I mentioned earlier the central pivot point is also the start of the sell zone, if price is coming up from underneath it.
So in this example that is 5 reasons why we can consider a short from this level.
Some traders also use mid pivots, which is basically the point in between two main pivots and price does tend to react to these levels too but whilst they may work to a degree you want to be cautious of not having too many pivot lines on your charts as this can make them look cluttered and hinder your spotting of nice set ups.
Most charting packages will provide a facility to have pivot points displayed on the chart, or a capability to calculate pivot points, so you really don’t need to worry about any of that.
The next question traders have regarding pivot points is which ones to use? For example some traders use pivots calculated based on EST timeframe others use pivots calculated on GMT timeframes etc…
The simple answer to that question is that they all work but if you want to stay safe just use the ones most relevant to your own trading time.
So for example, if you trade the London session you are best off using GMT based pivot points but if you trade the New York session you can use either GMT or EST pivots because this session overlaps with London so they both will be watched by traders to some degree.
Using the correct pivots isn’t too vital when you understand how we trade from pivots.
Again the core principles of our education come through in the way we use pivot points because it’s all about the confluence.
A pivot point will very rarely hold price on its own, but if you get several other levels of recognized support or resistance in confluence with the pivot point you have yourself a very nice high probability trade set up.
So just like with Fibonacci and old levels of S&R if you see a pivot level that has other reasons to buy or sell from there you can confidently expect price to react at least in a small way.
So for example, if you’re in the Buy zone for that day and you see a really nice confluence around one of the support pivots you may want to try and buy as price hits that support.
Remember all you need for a nice trade set up is a confluence of direction and a confluence of support and resistance levels.
The above example is a nice demonstration of a trading set up that adheres to the main important principles that we teach….but there are lots of other ways to get similar set ups whilst adhering to those core principles.
Pivot points are one very powerful tool to be using in your trading so you really should include them when looking for your trading set ups.
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