How to trade with Pivot Points support and resistance

A Pivot Point is basically like a price average of a currency pair calculated over a certain timeframe. The Pivot Point in trading is used to determine a focus exchange rate of a certain financial instrument that would then lead to predictions, analysis and various other forms of trading mechanisms.
 
For example, let’s say that the Pivot Point of the EUR/USD currency pair is 1.11 right now. This gives us 2 very important tools we can work with. These are support levels and resistance levels.
A support level is a price below the Pivot Point where the exchange rate of the instrument could drop.
A resistance level is a price above the Pivot Point where the price could potentially rise.
 
The Pivot Points Forex uses are usually looked at as a way to find these support and resistance levels in order to plan future trades more effectively. One thing that has been the case for quite a long time is that if an instrument reaches a certain support level, it will continue dropping. The same is true with resistance levels, if one of them is reached, it’s likely for the instrument to continue rising.
 
With this basic explanation of Pivot Points, it’s time to find out how you can use them in your own trades. This guide will help you understand how experts have used this tool effectively before.

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How to use the Pivot Points indicator

There are several steps that need to be taken when using Pivot Points for your trading strategy. This is mostly broken down into 4 steps on the most basic level, but advanced levels can have sometimes a dozen steps of preparation before you can even think of placing a trade. Let’s focus on the basic one for now.
 
  • Finding the Pivot Point (with external or internal software)
  • Highlighting resistance and support levels
  • Placing TP and SL points
  • Analyzing market sentiment
 
Let’s go through each of these steps.


Finding the Pivot Point

The essence of how to trade Pivot Points is in the skill of finding them first. In most cases, traders use external software that they download and install on their MT4 platforms. This software does the calculations for the trader and determines not only the Pivot Point but also the resistance and support levels.
 
There are ways to do this manually, such as calculating the average for exchange rates on the closing hours of markets in the previous days, but considering that the FX market doesn’t stop until Friday midnight, this may be a bit difficult. Generally, automating the process is much easier.


Highlighting resistance and support levels

Again, there is software that helps you do this automatically, but manually finding these price points is also not too difficult. Let’s look at the most recent USD/JPY chart.
Pivot Points Forex
As you can see we have 3 resistance levels (green) and 3 support levels (red) illustrated on the chart. The Pivot Points trading strategy revolves around finding these levels, and here’s how it is usually done.
 
Every price point where a downtrend stopped but has not fully recovered is technically a support level. In this chart’s case, we have 3 price points that managed to recover and the market is in an uptrend, therefore it’s an exception that we have the support levels where we have them.
 
Every price point where an uptrend stopped but has not fully recovered is technically a resistance level. As you can see on the chart we highlighted 3 price points which the currency pair managed to reach, but could not achieve more.


Placing TP and SL orders

TP stands for “Take Profit” and SL stands for “Stop Loss”. These are orders that help you passively close trades on indicated prices. Why are these so important in your Pivot Point trading strategy?
 
Because they help prevent any unnecessary loss when you’re not next to your device. You see, when traders have determined the support and resistance levels, it’s quite common to use them as TP and SL order price points. For example, it’s quite common for a downtrend to continue if one support level is broken. So, traders tend to place an SL order on the first support level.
How to trade with Pivot Points in Forex
Also, it’s quite common for uptrends to continue beyond the first resistance levels. Therefore, traders tend to place a TP order on either the second resistance level or somewhere between the first and second. This is believed to be the safest approach.


Analyzing market sentiment

Although the Pivot Points trading software may be very useful for finding these price points, it’s not always a 100% guarantee that you will be profitable. It’s a simple “background” analysis that most expert traders do before they evaluate the entire market sentiment.
 
Let’s go back to the same chart shown above. The highest resistance level we have there is somewhere around 109.3, but that does not mean it can’t go any higher, right? Therefore what expert traders tend to do is look at the current set of events that may affect their currency pair of choice. If they find a downtrend coming, then they will opt for short-selling below the Pivot Point indicator or above it if they see an uptrend.
 
In these cases, the most common strategy is to increase the timeframe for your Pivot Point software. If it was on 5 days, upping it to maybe a month or 6 would give a better picture.

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Pivot Points trading - Key Takeaways

A Pivot Point is the average exchange rate of a financial instrument calculated through its closing exchange rates within a certain period of time. It can be calculated both manually and with the help of software. In general, it is believed that the software is much more accurate than an individual trader and much faster as well.
 
Pivot Points are directly connected to support and resistance levels which are essential tools for trading safer. The support and resistance levels are calculated both with software as well as manually. The idea behind them is that a support level is a price point at which the exchange rate started rising, and resistance is where it started falling in the past.
 
In order to learn how to trade using Pivot Points in Forex, traders need to understand that they are not 100% reliable. Pivot Points help highlight the prices that are slightly safer than a random choice. Both downtrends and uptrends tend to continue without stopping at exactly where the software said a resistance or support level was.


FAQ on Pivot Points trading strategy

How can I calculate the Pivot Point?

Pivot Points are calculated by taking the average closing price of an instrument over the course of several days or weeks. It is much easier to calculate for markets that actually have a closing time, which is why it’s so common with stocks and commodities. With Forex, it’s a bit harder as closing prices only happen once a week on Friday. Because of this, most Forex traders are recommended to use the software for calculating.


How do I use the Pivot Point technical indicator?

There are quite a few types of Pivot Points indicators that traders can use, but the one provided for MT4 has reported being quite reliable. Most traders recommend downloading the indicator straight from the MetaQuotes marketplace. It will have both the Pivot Point as well as the resistance and support level indicators. Most people download the free version, but there are also paid ones available that have additional features.
 
But just like other indicators, it’s not worth buying a tool unless you’re 100% sure you need that extra feature.


What is the most optimal timeframe for Pivot Points?

In this case, it all depends on the type of financial instrument you are using the Pivot Point for. The question, “what are Pivot Points” usually has different meanings for different instruments. With Forex, the most optimal timeframe that traders have reported is 5 days. The software is able to research and calculate a whole trading week’s sentiment and market movements and place a fresh Pivot Point for Monday when the market opens up again.

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