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Pivot Points
Pivot Points are used to establish key points of support and resistance. The traditional methodology for calculating Pivot Points is to use the trading range from the previous daily interval candle, however they can also be calculated on any time frame to suit the strategy being developed.
Pivot Points are traditionally made up of 7 levels:
Levels: | |
---|---|
P | The central mid Pivot Point line between the Support and Resistance levels, which is based on a weighted average mid price of the previous day trading range |
R1 | The first potential level of resistance above the Pivot Point line. During periods of low volatility the price will contained with the R1 level. |
S1 | The first potential level of support below the Pivot Point line. During periods of low volatility the price will contained with the S1 level. |
R2 | The second potential level of resistance above the Pivot Point line. During periods of normal trading volatility the price will be contained with the R2. |
S2 | The second potential level of support below the Pivot Point line. During periods of normal trading volatility the price will be contained with the S2. |
R3 | The third potential level of resistance above the Pivot Point line. Only during periods of high volatility will the price break through the R3 Pivot Point resistance level. |
S3 | The third potential level of support below the Pivot Point line. Only during periods of high volatility will the price break through the S3 Pivot Point support level. |
Pivot Points lend themselves to Mean Reversion trading strategies as the price action tends to revert to the central Pivot Point Line after closing between R1 and R3 for bearish reversals and S1 and S3 for bullish reversals. There are many methodologies for deciding when to open a Mean reversion position including using the following rules based on shorter term price interval of for example 1 hour:
- Sell if the price closes between R1 and R2 / Buy if the Price closes between S1 and S2
- Sell if the price closes between R2 and R3 / Buy if the Price closes between S2 and S3
- Sell if the high price is below R2 and above R1 / Buy if the high price is below S1 and the low price is above S2
- Sell if the high price is below R3 and above R2 / Buy if the high price is below S2 and the low price is above S3
- Sell if the price closes between R1 and R3 followed by a Bearish reversal candlestick pattern / Buy if the price closes between S1 and S3 followed by a Bullish reversal candlestick pattern
As the price breaks through each consecutive Pivot Point level, the potential for greater return increases as the distance to the Mean central Pivot Point increases, however it also is associated with higher risk as the price volatility is increasing.
From a exit perspective, close the position when:
- If long, sell when the price is below the Pivot Point Line or stop out when the price breaks through R3
- If short, buy when the price is above the Pivot Point Line or stop out when the price breaks through R3
For Momentum based trending strategies, a price break out through the upper third resistance or support pivot point can be used to open a long or short position respectively. After a breakout through the R3 or S3 level, it can take the price a while to converge back to the central Pivot Point line, therefore consider using a shorter interval trending indicator like a traditional Moving Average or MACD crossovers to exit Momentum based positions.
Traditionally Pivot Points are calculated on a daily interval candle. It can however be advantageous to use alternative time frame, such as 1 hour for more frequent intra day trading. A potential advantage of Pivot Points based on shorter interval periods is that if there is a strong directional move within a day, if the Pivot Point is based on an intra day interval, the central Pivot Point Line will converge on the new price level closing out the position, most likely at a loss, but allowing new trading opportunities to be capitalised upon.
With timetotrade you can set the interval that the Pivot Points are calculated on as illustrated:
Pivot Points Formula
The formula used to calculate the central Pivot Point line is:
The first Pivot Point Resistance level R1 is based on the following formula:
The first Pivot Point Support level S1 is based on the following formula:
The second Pivot Point Resistance level R2 is based on the following formula:
The second Pivot Point Support level S2 is based on the following formula:
The third Pivot Point Resistance level R3 is based on the following formula:
The third Pivot Point Support level S3 is based on the following formula:
Pivot Points Indicator
The Pivot Points indicator can be displayed on the TimeToTrade charts. To add the Pivot Points indicator to the TimeToTrade charts, go to the chart settings and click on the 'Add Indicator' button. Click on the search box and type the name of the indicator that you are looking for, or for example type Pivot Points and scroll through the results:
After adding the Pivot Points indicator, within the chart settings, click on it to set the parameters and change colours.
Pivot Points Alerts
Alerts can be set up to provide an Email or SMS text message notification of when your Pivot Points indicator chart conditions have been met, backtest trading strategies or execute demo trades. To learn more:
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