Day Trading Using Pivot Points


This might come as a surprise to many traders, but pivot points are simple and highly effective tools that can help you to earn from the price fluctuations. All over the internet, you will hear many wonderful things about pivot points. Quite often, you will come across the daily pivot point supporting / resisting the movement of price.

Pivot Point also enjoys its own Wikipedia page – something that you will never find for any other trading systems. You can access it over here Pivot point (technical analysis).

Now a little bit of history about this trading system. Back in the days, the floor traders needed something to weigh upon, in order to place buy and sell orders with confidence. No one knows about the veracity of this statement. However, I have come to the conclusion that it was William Greenspan who introduced pivot points to the masses.

The calculations used for pivot points are as follows:

R3 = H + 2×(P − L) = R1 + (H − L)
R2 = P + (H − L)
R1 = P + (P − L) = 2×P − L
P = (H + L + C) / 3
S1 = P − (H − P) = 2×P − H
S2 = P − (H − L)
S3 = L − 2×(H − P) = S1 − (H − L)

where R1, R2, R3 are the resistances and S1, S2, S3 are the supports. P or the pivot point is calculated by taking the average of the previous trading day’s High, Low and Close.

On September 14 2015, EUR/USD made a high price of 1.13289, a low price of 1.12586 and a close price of 1.12686. Using the above-mentioned calculations, we can get

R3 = 1.1382
R2 = 1.1356
R1 = 1.1312
P = 1.1285
S1 = 1.1242
S2 = 1.1215
S3 = 1.1172

Most of the information that I have cited so far, is easily available from plenty of other sources on the World Wide Web. It is as if everyone knows the calculations; but they are simply unsure about the ways to implement them while day trading.

Here are my recommendations.

If the price stays below the pivot point i.e. 1.1285, then there is a tendency for the price to fall towards S1, S2 and finally S3. The pivot point will form the ultimate resistance / support for the price. Successful traders will use this information to position themselves with certainty!

Other traders will wait for the price to touch either R1 or S1, so that they can sell or buy while using R2 or S2 (respectively) as the stop loss. In other terms, you can place a sell order at 1.1312 with a stop loss of 1.1356. Likewise, you can place a buy order at 1.1242, with a stop loss of 1.1215.

There is yet another interesting approach cited by William Greenspan in many articles. Here is a brief run down of his technique. Look at the current opening price of EURUSD for the day. It is 1.12686 (in forex, yesterday’s closing price = today’s opening price because it is a 24 / 5 marketplace). So, the current opening price 1.12686 lies in between the pivot point and S1. Wait and watch the price action; you will have to wait until the price touches the pivot value (1.1285) or S1 (1.1242). If it touches the pivot value, then go long at the point. The stop loss will be S1. The target will be R1. For the sake of illustration – just imagine that the price opened above the pivot value. Then you must short once the price touches the pivot value. Target will be S1 and the stop loss will be R1.

The beauty of this technique lies in the fact that the trader will get opportunities to trade with the trend or against it depending upon their mental temperaments.

As with anything remotely related to trading, you must study how the price reacts every time it touches one of these values. With ample screen time, you will get a hang of the trading instrument.

I would welcome the traders to experiment with the default pivot point trading calculations listed above. Use an excel spreadsheet and you can get these calculated on the fly before every trading session. There exists several other subtle modifications of the pivot points, but I would recommend sticking with the default calculations.

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