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Since the dawn of widespread computer use and the internet over the last twenty years, there have been many providers of new trading indicators that have risen to prominence. Likewise, for each one that is well remembered, there have been scores of websites and indicators that have fallen by the wayside. While technical analysis is not new, as a discipline it has flourished in the rise of the internet age.
However, technical indicators have been prospering for a century. In fact, it is argued these have been around in one shape or form for even longer than that. There are many old-school approaches to technical analysis which have become antiquated,while others, such as simple moving averages, continue to be widely used today.
Pivot points have been around for some time. You can read more about their history, formula, and usage here. Back in the days when technical analysis was all done by pencil and on paper, pivots were a vital indicator. The most simple calculation is the high of a given timeframe plus the low, added to the closing price divided by three, which looks like H+L+C/3=Pivot. From there, other calculations can project anticipated support and resistance levels.
These are pretty fundamental to any electronic charting platform and can be modified according to the practitioner’s preferences. Like any other indicator, it has its flaws and is very subjective. However, I believe that any system with lines on a chart has the potential to be fruitful when implemented with good risk to reward.
One benefit to pivots is that they can be used on any timeframe. I know institutional FX traders who like the monthly pivots, while I knew many traders on the CME and CBOT floor who used weekly and daily pivots as a significant part of their success. For myself, I have intraday systems that utilize hourly pivots.
Shown below is an hourly chart of the USD/JPY (dollar vs. yen) that I pulled up this morning with the monthly pivot and support/resistance levels. I picked this randomly to give a general picture of how the scenarios play out. Different traders will have varied approaches, but today you will read about the one I am most familiar with.
The pivot (in yellow) sets the bias. When above the pivot you expect the market to rise to the first resistance level. Alternatively, when below the pivot, you expect the market to trade to initial support. Now, just because the market crosses the pivot does not mean this is a signal to go long or short. Sometimes the market chops around the pivot, and without any momentum or trend, there is no compelling reason to enter the trade. Many traders will wait a certain amount of time or bars to print before they take a trade based on a pivot.
There are generally three levels of support and resistance, often seen as S1, S2, S3 and R1, R2 and R3. Once bias is established based on the pivot, one then expects the market to target the first support or resistance level. Again, just because S1 may trade, doesn’t mean this is an automatic time to go long. In fact, each layer may serve as its own pivot. What I have found is that in markets that are in low volatility, the first layer of support or resistance offers a great place to counter the move. However, in more heavy trending markets, the secondary levels become more prominent targets. In markets with very high volatility, the third layer then becomes most important. Furthermore, during times of historic volatility, I would discard pivots all together.
Any indicator is enhanced in combination with others that give a different picture of the same market. Therefore, pivots may be used with a momentum indicator and price oscillators detecting overbought and oversold, in order to increase the odds.
Consider the chart below: gold futures on the five-minute timeframe covering the full session yesterday. On the chart is the daily pivot with support levels, and the lower indicator is the True Strength Index. You will see that on the first test of the pivot, it held as support on the price chart, meanwhile, the lower indicator crossed upward confirming a buy signal. However, later in the session, on the second test, the pivot failed and gave way to a downward bias. The lower indicator did not suggest buying this second attempt at the pivot because it was sloping lower, having already made a bearish cross.
As gold broke through the first and second support levels, the lower indicator was pointing downward, giving a no-buy signal. Finally, when gold tested the S3, the indicator was pointing higher and was making a bullish cross, thus signaling that it was a credible place for support.
This is just a single example of how the pivot points might enhance your trading when used with a single indicator. It is also worth mentioning that these can be used on any chart. However, one might consider that in a market that is divided between a primary and secondary session, like the U.S. futures markets such as the equity indexes, many often will pivot in just the primary session. However, that is not a rule; pivots can be used very differently to suit your unique trading style.
What’s most important is that we are continuing to learn, grow, and evolve. There are many different traders who visit this blog, some who are just beginning to consider what a life would be like as a full-time trader, and others who have realized that dream. If you have some good ideas about pivots, or an indicator that you believe successfully complements the trading style, then please use the comments section below to enhance the purpose of this article.
Happy trading everyone!
