Pivot points are key areas of support and resistance which can be plotted on the charts on a daily, weekly or monthly basis. The daily pivot points are the ones described in this strategy, and are derived from the high, low and closing price of the previous day’s price action.
There are lots of sources of the automatic pivot point calculator, which is a custom MT4 indicator that can plot the pivot points and update them every new trading day. This takes away the stress of having to calculate the pivot point values and manually plot them on the charts.
The MT4 or MT5 charts can be used in setting up the pivot point indicator. Two variations of this indicator exist. There is one which retains the trace of previous pivot points, and there is the version which does not. No one is better than the other; it depends on the trader’s preference. The chart setup is therefore as follows:
The strategy can be used in any trading session.
The pivot point indicator plots the following pivot points:
In truth, any of the pivots can serve as support or resistance, depending on whether prices are coming from above or below. Therefore, price coming from the S3 area will find S2 and S1 as a resistance, while price coming down from the R1 area will find the central pivot as the first support to test.
We would be looking for price to find support or resistance at a pivot point, combined with a candlestick pattern or other technical basis to support a trade in the direction of the price rejection or support at a pivot point.
Here, the trader is aiming to trade a bounce of price action off a pivot point. In this case, the price action should be coming from above, find support at a pivot point, and then trade upwards to provide profits for the position. This is how the trade is setup:
The chart below showcases a long trade setup, including a condition where the trade entry is invalidated by a candle closing below the pivot.
In this example, the S2 pivot is tested twice and held firm, prompting the trade entry at the open of the next candle. Earlier on, a setup occurred, which did not favour an entry on the S1 pivot. Subsequent price action goes to confirm that ignoring the temptation to enter long at that point would have been a good idea as price kept going south.
The proper entry worked out, with price hitting the target (S1 pivot) in one hour.
Trading short requires trading a rejection of a candle at a pivot point, in which case price has to come from below. This is how the trade is setup:
The chart below showcases a short trade setup.
In this example, the R1 pivot acted as the resistance pivot and a trade was easily setup with profitability at the R1 pivot. The profit target was the central pivot line.
Both examples featured the use of a dynamic pivot point calculator, which traces new pivot points automatically without the need to refresh the page. This particular pivot point calculator is named “Auto Pivot Plotter”. It is free and you can check online for the latest version.
The advantage of this particular indicator is that sometimes, pivot points may cluster around the same price levels for a few days. A look at the chart history will show what the relevant pivots have served as support/resistance to price action. This information may become relevant and may support whatever entries you wish to make at the present time.
Here, we can see that the R1 pivot from which prices began to head downwards was at the same price level as the central pivot (which also resisted upside price movement) a few days before. So use a dynamic pivot calculator which displays historical pivot points for referencing purposes when searching for current trade opportunities.