Pivot Points – What They Are & How to Trade with Them

Pivot Points – What They Are & How to Trade with Them

What Are Pivot Points?

Pivot Points are calculated price levels used to determine potential support and resistance zones for the upcoming trading session. They help traders identify market direction, key reversal areas, and breakout levels. Pivot Points are widely used by day traders and scalpers due to their reliability.

The Pivot Point formula is:
Pivot Point (PP) = (High + Low + Close) / 3

From this central Pivot Point, support and resistance levels are derived as follows:

• Resistance 1 (R1) = (2 × PP) – Low
• Resistance 2 (R2) = PP + (High – Low)
• Resistance 3 (R3) = High + 2 × (PP – Low)
• Support 1 (S1) = (2 × PP) – High
• Support 2 (S2) = PP – (High – Low)
• Support 3 (S3) = Low – 2 × (High – PP)

Key Features of Pivot Points

• Help identify support and resistance zones.
• Provide key levels for breakout trading.
• Work well for intraday and short-term traders.

How to Use Pivot Points in Forex Trading

1. Reversal Trading Strategy

Pivot Points act as key reversal levels:

• Buy when: Price bounces off support (S1, S2, or S3) and starts rising.
• Sell when: Price rejects resistance (R1, R2, or R3) and starts falling.

2. Breakout Strategy

Pivot Points help confirm breakout trades:

• Buy when: Price breaks above R1 with increasing momentum.
• Sell when: Price breaks below S1 with strong bearish pressure.

3. Pivot Points with Moving Averages

Pairing Pivot Points with a moving average (e.g., 50 EMA) improves accuracy:

• Buy when: Price is above the 50 EMA and breaks above the pivot level.
• Sell when: Price is below the 50 EMA and breaks below the pivot level.

4. Pivot Points with Momentum Indicators

Using Pivot Points with RSI or MACD confirms trade signals:

• Buy when: Price tests a support level, and RSI is oversold.
• Sell when: Price tests a resistance level, and RSI is overbought.

Pros and Cons of Using Pivot Points

✅ Pros:

• Provide clear support and resistance levels.
• Help traders plan trade entries and exits.
• Work well in intraday and short-term trading.

❌ Cons:

• Less effective in highly volatile markets.
• Require confirmation from other indicators for best results.

Final Thoughts

Pivot Points are essential tools for forex traders looking to identify key price levels, confirm trends, and optimize trade entries. When combined with moving averages or momentum indicators, Pivot Points enhance trade accuracy and decision-making.