Pivot indicator provides the core pivot level, also called the anchor point, and three lower support and upper resistance levels. The support and resistance levels are calculated based on the core pivot level and the previous session range. The concept behind pivot levels is that the support and resistance levels form-critical levels where the market sees a struggle between bullish and bearish participants. For example, prices tend to stall from moving upwards at resistance levels as bulls and bears tend to defend those levels. Likewise, prices tend to stall from moving downwards at support levels as bulls and bears tend to defend those levels. It has been observed that volume is higher in most of the cases when prices reach support or resistance levels. When resistance or support levels are broken, most of the time price continues to move towards the next support or resistance level. When resistance is broken, the bulls have overpowered the bears, whereas when support is broken, the bears have overpowered the bulls.
Traders can take advantage when price breaks the support or resistance levels and trade in the direction of the trend.
The formula for calculating the pivot levels is as follows,
Pivot = (High + Low + Close) / 3
R1 = 2 x Pivot – Low
S2 = 2 x Pivot – High
R2 = Pivot + (R1 – S1)
S2 = Pivot – (R1 – S1)
R3 = High + 2 x (Pivot – Low)
S3 = Low – 2 x (High – Pivot)
In the first step, we calculate the base Pivot level, the anchor point, which is the mean of the previous High, Low and Close price. Subsequently, we calculate three support levels below the anchor point and three resistance levels above it respectively.
Traders may also use pivot levels calculated on higher time-frames on the (current) lower time-frames to provide a better perspective of the critical trade levels. For example, when trading on hourly charts, a trader may use daily pivots (calculated from yesterday’s daily range) to identify the support and resistance levels. By using such techniques the trader can get a perspective of both the higher time-frame and the current time-frame to make trading decisions.
The pivot indicator does not provide trading signals by itself but should rather be used in conjunction with other technical indicators to identify trade entry and exit points. The most popular technical indicators used in conjunction with pivot levels are Moving Averages and MACD.
Enter a BUY trade when the price crosses above a resistance level with a higher volume. The stop-loss can be set slightly below the previous pivot level. The initial profit target can be set to the next resistance level. Aggressive traders tend to avoid using a profit target but rather employ a trailing or break-even stop at the nearest lower pivot level. This technique ensures higher profits when there is a strong and sustained breakout in the trade direction.
BUY trades can be avoided when the price is below the Moving Averages on the current time-frames and still falling without consolidation. This protects traders from entering false trades.
Enter a SELL trade when the price crosses below a support level with a higher volume. The stop-loss can be set slightly above the previous pivot level. The initial profit target can be set to the next support level. Many aggressive traders avoid using a profit target but rather employ a trailing or break-even stop at the nearest upper pivot level. This technique ensures higher profits when there is a strong and sustained breakout in the trade direction.
SELL trades can be avoided when the price is above the Moving Averages on the current time-frames and still rising without consolidation. This protects traders from entering false trades.
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