Pivot Points Explained
Thanks again for all your emails and questions.
Lately, I’ve had a few queries about Pivot Points, like this one from Clive:
“I have a question about Pivot Points that I was hoping you’d be able to help with and perhaps your other readers have the same problem:
How do you find reliable Pivot Point data and which one to use?
Every trading platform and data provider has different levels for the Daily Pivot Points and as I use them heavily for my trading I was wondering if there was a definitive source?
IG index differs to ESignal, which differs to Metatrader which differs to the Pivot Farm website etc…..
Why do they all calculate them differently and which is best to use?
Thanks in advance – Clive”
Let’s back up a bit… we’ll get to where to find them later.
But this might all be new to you… so why don’t we start with this question: “What are Pivot Points?”
Well, Pivot Points show traders support and resistance price levels – those price points where the market may pause for breath, or turn around.
And they tend to be used mainly for day trading, as they can show you points of price strength and weakness.
That’s why many professional traders do use short term pivot points in their trading.
The result is that they can sometimes be self- fulfilling… and you may indeed see the market turn at the Pivot Points.
So, they can be useful indicators in your trading… but what do they look like, and how many are there?
Well, you normally have a central Pivot Point – which can act as a support or a resistance price level.
Then, you normally have three Resistance points above, called Resistance 1, Resistance 2 and Resistance 3.
In addition, below the central Pivot Point you normally have three Support Points.
You’ve guessed it – they’re called Support 1, 2 and 3.
Now for the slightly confusing part.
Pivot Points are calculated from a simple formula… but they’re worked out differently depending on the time frame of the chart you use.
If you use very short term charts such as 5, 15 or 30 minute candlestick charts, you would use Daily Pivot Points.
These are calculated with simple formulas using data from the previous day’s high, low and closing prices.
But for charts with timeframes of more than one hour – but less than one day – you would use Weekly Pivot Points.
So charts using a 4-hour timeframe, for example, would be calculated using Weekly Pivot Points.
These are calculated from the previous week’s high, low and closing prices.
Are you still with me?
And then finally, if you were using daily charts, Monthly Pivot Points are normally used.
These are based on the monthly high, low and closing prices.
So the first thing you need to know to use Pivot Points is what timeframe you want to trade.
How Do You Add Pivot Points To A Forex Chart?
Thankfully, these days you don’t need to calculate them longhand.
That would take ages.
Many charting packages now calculate them for you, as Clive points out.
Personally, I use IG Index – as I’m more familiar with their platform.
But to plot Pivot Points on IG Index means you have to sign up for their Advanced Charts package.
Pivot Points aren’t available on their free quick charts… so there’s a small potential cost involved.
This will set you back £30 a month as soon as you sign up – but they will refund this if you make more than 2 trades in a month.
So, if you trade regularly it shouldn’t be a problem.
All you have to do is log in, go to the ‘My Account’ tab, then click ‘Settings’.
Then, go to ‘Preferences’ and scroll down to activate Advanced Charts.
After that, it’s easy to open the Advanced Chart and plot the Pivot Points.
You just open the deal ticket window and select Advanced Chart for the currency pair that you’re trading.
It does take a bit longer to open these charts, and you have to download a new Java application…
But it should still only take a couple of minutes.
Then, to plot the Pivot Points, you simply click the Price Settings icon in the top left hand corner of the chart.
It looks like a spanner, as shown below:
You then add the Pivot Point indicators from the drop down menu, as shown below:
The Pivot Points box then opens and shows you the Pivot Points that will appear on your chart.
There is a box for the Pivot Period.
Remember, you must select ‘Daily’ for charts in timeframes of less than one hour.
Plus, there are also three different formulas to calculate the Pivot Points.
As far as I know, there isn’t one definitive formula – they are all slight variations on essentially the same thing.
Personally, I tend to use the top box for short term trading.
You then close the Settings box, and the Pivot Points appear on your chart:
This is the EUR/USD 15-minute chart, so I am using daily Pivot Points.
You can see the main Pivot at 13039.0 and the R1 (Resistance 1) at 13108.0.
And interestingly, can you see how the market price is pausing for breath at this resistance point (R1).
But like resistance and support levels, they are only indicators – and are never set in stone.
They are not definitive.
But like other indicators, they can help you to spot potential trade opportunities when used with the right trading system…
And that’s why they’re so popular with professional traders.