Pivot points are a popular tool among daytraders due to their predictive nature. Pivots points are used to establish potential key support and resistance areas and also for short-term trading to set entry and exit points.
Standard Pivot Point Formula
■ The high, low and close of the previous period, are the three prices used in the pivot point formula. The previous period usually used is the daily chart but timeframes from five minutes to the monthly can also be used. Usually, the daily pivots are considered more significant and reliable than the shorter timeframes pivots.
■ The preferred close for the daily pivot points for Forex trading is usually 5pm ET, for other markets use the close of the chosen trading period for your market.
■ The outlook is bearish if the price is trading below the pivot point, conversely the outlook is bullish if the price is trading above the pivot point.
■ The pivot point is considered the most important, large price movement is expected at that level followed by Resistance 1(R1) and Support 1(S1) levels, look for reversals or breakouts at these levels. The market is considered overbought when the price reaches Resistance 2(R2) or Resistance 3(R3) levels, conversely the market is considered oversold when the price reaches Support 2( S2) or Support 3(S3), it’s best to use those levels for exits rather than entries.
