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Pivot Points - effective identification of key zones on the price chart
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Pivot Points - effective identification of key zones on the price chart

created Paweł AdamczykApril 18 2019

Almost every form of technical analysis is more or less based on levels of support and resistance. As is known, these levels are crucial, because they are aptly designated, they can show certain turning points on the market, where there is a "fight" of demand and supply. There is no doubt that skilful designation of such zones gives us an advantage over other market participants and is an extremely useful skill in everyday trading. Many traders, especially at the beginning of their way with the financial markets, have a certain problem in the proper determination of support and resistance. There is a wide range of tools for determining these types of zones. In this article, we will present a tool that is not very popular among investors, but with its help, zones can be determined as well as using classical methods.

The term Pivot Points

Pivot points is nothing else an indicator that determines levels of support and resistance based on a mathematical formula. The basic variables that are used with this method are the peak, the bottom, and the closing price. The formula for determining pivots is based on historical data.

At the beginning, you should specify the basic variables:

  • C (closing level),
  • H (maximum price),
  • L (minimum price).

The arithmetic mean of the given variables is the basis.

P (pivot point) = (C + H + L) / 3.

Regarding resistance levels (R) and support levels (S), we set them as follows:

  • R1 (first resistance) = 2 * P - L,
  • R2 (second resistance) = P + (H - L),
  • R3 (third resistance) = P + (H - L) * 2,
  • S1 (first support) = 2 * P - H,
  • S2 (second support) = P - (R1 - S1),
  • S3 (third support) = P - (H - L) * 2.

The indicator on the MT4 platform automatically marks places on a given market, where the price may potentially rise, fall, or where it may slow down / stop. There are many different types of analysis and ways to use pivot points in the trade. One of the methods you can find in THIS article. Initially, for greater clarity of the graph, we can only select the R1 / S1 level in the display options.

pivot - 1

Examples of pivot points, OIL market, XTB xStation 5

Practical use of Pivot Points

Undoubtedly one of the biggest advantages of the indicator is the fact that setting the levels purely mathematically, helps to limit the influence of emotions on making specific decisions in trade. It is, however, worth it in everyday investing, not based on just one indicator.

Pivot points are best suited as support for classic methods, or additional confirmation when, for example, we are not entirely sure if the levels we set are correct. The basic interpretation of the indicator is quite simple. Generally above the main pivot line (black) we have levels of resistance, that is, the zones that we can use for sale. Below the line, we have support levels that are analogous to buying zones. One of the methods of use in everyday trade is the observation of the price at the designated levels and after the appropriate signal / confirmation, joining a specific market site.

It is also worth using the pointer as confirmation of breaking certain key zones on the market. Then we use the indicator in the following way. We are waiting for the level to be broken, as confirmation we can set eg closing the candle above / below the given level and we are playing on the continuation of the given traffic. We can both wait for the retest and enter the position immediately after breaking the zone, it depends on our investment style. The basic targets for the position can be taken in the next levels shown by the indicator.

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Example application of pivot points, currency pair EURUSD, XTB xStation 5

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About the Author
Paweł Adamczyk
A graduate of the University of Economics in Katowice. Since her student days, passionate about the currency market, stock exchange, and broadly understood investments. An active trader on the Forex market since the 2013 year. In making everyday investment decisions, in the first place puts the key aspect of the market, the price. A fan of motorization, travel and extreme sports.