Richard has more than two decades of experience in the financial markets and has had his writing appear on CNBC, NASDAQ, Economy Watch, Motley Fool, and Wired Magazine
Pivot Points allow traders to define important support and resistance levels or to identify potential changes in trend direction. For active traders, there are five different types of pivot points that are commonly used by expert technical analysts and we will look at each of these methods in closer detail in this article. Each of these different pivot point trading indicator types provides a slightly different take on the discipline’s established concepts.
However, the wide variety of trading strategies that are discussed in this guide also shows traders the high level of diversity which characterizes the use of pivot point indicators as a systematic approach to technical analysis.
While this list of different pivot point techniques might look intimidating at first, it should be understood that the basic ideas and concepts that underlie the market’s broader approach to pivot point trading strategy remain largely the same. Generally speaking, pivot lines are plotted horizontally in order to indicate potential zones of price support or price resistance. Any time a chart breakout occurs near these pivot zones, the direction of the break (upward or downward) can work as a primary indicator of market sentiment so that new trading positions can be established based on the trend as it emerges.
Standard Pivot Points allow traders to plot support and resistance levels around a central pivot that is determined by a series of simple calculations. The central price pivot takes the sum of the price high, the price low, and the closing price of whichever time period is selected in a trader’s charting station. This total sum is then divided by a factor of three, and this figure forms the basis of future pivot point indicator readings.
In the chart example shown above, we can see that pivot points that are higher prices are expected to act as resistance levels. In contrast, pivot points that are below prices are expected to act as support levels.
Camarilla Pivot Point indicator systems were first introduced to the financial markets in the 1980s. These trading systems were based on concepts that are similar to Woodies because pivot prices are based on prior-day closing prices. For traders, the main difference between Woodies Pivot Points and Camarilla Pivot Point trading rules usually lies in the fact that Camarilla trading strategy systems are based on four levels of price resistance and four levels of price support. Remember, this is in contrast to the Standard Pivot Point system, which is based on just two price levels for resistance and two for pivot support.
Another interesting point for traders to remember is that the equations for the Camarilla system use formula variables that are more much more specific and systematic in nature. In the Camarilla pivot points formula, non-zero decimals (i.e. 1.5, 1.25, 1.16, and 1.0833) are used as the multipliers and each of these equations create nine different price levels on the trading station.
For newer traders, the Camarilla daily pivot trading strategy system might be more challenging given the fact that each price chart will show four different support levels and four different resistance levels. However, this additional information can also prove to be highly useful for experienced traders that are somewhat familiar using pivot point for day trading strategies.
Many traders utilize Camarilla pivots indicator mt4 through intraday strategies that fade short-term trend moves after prices have reached S3 or R3 levels on the trading station. In these cases, short trades might be established after prices rise to R3 price resistance (with the goal of selling high to maximize profits). Conversely, long trades might be established after prices fall to S3 price support (with the goal of buying low). The main idea is that cyclical markets offer opportunities during rising and falling trend activity and this makes it much easier to achieve profits in diverse financial environments.
Pivot strategies typically work based on the assumption that strong trends in price activity during one session will often be followed by trading sessions characterized by retracements during the next market session. Historical backtesting results suggest market trading ranges typically accompany this type of price action, so day trading pivot points can often make it easier to structure trades in live broker platforms. Additionally, pivot points can help traders find levels to place stop-loss orders and these protective techniques are often placed outside of S4 support or R4 resistance zones.
In cases where market price activity continues to move beyond S4 or R4 pivot zones, traders might instead opt to implement a “stop and reverse” strategy. In other words, prior long positions can be closed so that new short positions can be established. Similarly, prior short positions can be closed in cases where new long positions should be established for the same financial market asset.
Less commonly used pivot point indicators include the Woodies Pivot Points indicator. Woodies Pivot Points also allow traders to plot two pivot support and resistance levels, based on a central pivot. Under the system, this central pivot places the first resistance level at a price point that’s 2x the Pivot Point minus the price lows. Finally, the price boundary that results is plotted using the sum of the Pivot Point and the difference between the price high and price low of the charting period.
The pivot calculation that is used for the Woodies pivots systems are often described as being quite different from the formula that determines levels for Standard Pivot Points. In this respect, a primary difference lies in the fact that the formula for the Woodies system places additional weight on an asset’s closing price activity. As a result, this system works in ways that are similar to strategies that involve the use of Exponential Moving Averages (EMAs) because price data that is recent will be weighted most heavily (in relation to earlier price data).
Fibonacci numbers are regularly used in modern portfolio strategies for investments, and this type of analysis can be applied for those individuals that are using pivot points for day trading, as well. On trading station software applications, traders can easily find tools allowing access to popular trading platforms like Fibonacci pivot indicator mt4. Fortunately, these trading programs make it easier for investors to find economic indicator studies related to Fibonacci retracements, projections, and extensions. Interestingly, these tools are often employed by people that trade using pivot points in the Forex market or in cryptocurrencies. However, these tools can also be quite effective in commodities markets and stock markets, as well.
Primary price levels in Fibonacci pivot formulas are typically associated with the Fibonacci numbers at the 38.2% and 61.8% retracement levels. These trading tendencies often force investors to monitor these retracement levels quite closely whenever trades have a chance to reach profitability based on the system projections. One strategy that is actively used in the market is to view important Fibonacci pivot point indicator readings in combination with price patterns (such as a triangle pattern or head and shoulders pattern). Additional price patterns that work in conjunction with pivot point price levels are often viewed as strong market signals.
When traders are monitoring Fibonacci pivot indicator levels, it’s often a good idea to view the central pivot level as a starting point and watch for new trend direction in relation to yesterday’s price values. Traders can simply multiply the range values from the prior trading day by any known Fibonacci ratio (usually 38.2% or 61.8%). Finally, expert traders are able to define and modify a trading stance after adding the results from these calculations to the pivot point value (when identifying resistance levels) or subtracting the figure from the pivot point value (when identifying support levels). In combination, these techniques allow traders to initiate a trading stance that is clearly defined as either bullish or bearish.
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