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Part II. How to use Pivot points

How to use Pivot points - Forex School
Commander in Pips: So, we know what Pivot points are, how they look like and how to calculate them – let’s shift to the application of Pivot points in Forex trading.

Pipruit: All right!​

Commander in Pips: Before shifting to strategies directly, let’s lay out the rules that have to be applied to the general use of Pivot points:

General use of Pivot points - Forex School

1. It is preferable to use pivot points 1 time frame higher than that of your trading time frame. If you trade on the daily time frame – use weekly pivots, if you trade on the weekly time frame – monthly. If you trade intraday – you may use daily pivot points as well;


2. Higher time frame pivots are very important for lower time frames. Say if you trade on 30-min charts it does not mean that you should not take into consideration weekly pivots and focus on daily ones only. You have to know where weekly and monthly pivots are even if you trade on 5-min charts.

3. Application of daily pivot points is not spread wide. Some traders use them, but they are much weaker than weekly and monthly. I also very rarely use them. But this is personal – if they work for you – use them!

4. It’s usually assumed that pivot resistance 1 estimates the high for the period and pivot support 1 estimates the low for the period. For example, if we talk about week, then weekly resistance 1 shows the potential high for the week, and weekly pivot support 1 shows the potential low. The same for monthly pivots. But this is just an assumption and not a rule of thumb.

5. Usually the market trades pivot points during the period with a probability around 70-80%. It means that the probability of touching the weekly pivot point by the market during the week is 70-80%. So, if you intend to enter long, but the market stands above the pivot and has not touched it yet – the probability on your side. Possibly you will get much better entry point, when market tends to pivot point. The same is true for downward scenario.

6. When market retraces during a long-term bull trend on the daily chart – it usually retraces to the weekly pivot point or weekly pivot support 1. If market breaks pivot support 1 after a strong up trend – it could be an early notification about breaking of the previous tendency.

7. When market retraces during long-term bear trend on daily chart – it usually retraces to the weekly pivot point or weekly pivot resistance 1. If market breaks pivot resistance 1 after strong down trend – it could be an early notification about breaking of the previous tendency.

8. Pivot point, resistance 1 and support 1 are the most important levels, others have much less importance.

9. Combination of pivots with Fib support/resistance, common support/resistance or overbought/oversold areas makes them stronger.

10. If the market hits some important Fib extension target (usually 1.0 or 1.618) at oversold/overbought area and then moves below/above weekly pivot point – it tells that retracement has started and the move could be very strong;

11. You may understand why does the market take a directional move or retracement move by applying pivot points. If the market does not touch weekly pivot supports 1 in an up move on daily chart or pivot resistance 1 in a down move and weekly pivot point holds market – then the market isin a directional move. If the market reaches support 1 during up move or resistance 1 in a down move – hence, market falls into retracement.

12. If the market stands near the pivot point on Monday – it’s better to wait while it will test it during the US trading session and choose the direction before entering the market.

13. If the market shows a strong bull/bear trend during a number of weeks on the daily chart when price rarely has touched even weekly pivot points and then the market turns to sideways consolidation, forms some bearish/bullish reversal pattern (engulfing for instance) inside this consolidation and close below/above weekly pivot – it could warn about a future strong downside/upside move.

14. If the market shows a strong bull/bear trend during a number of weeks on the daily chart when price rarey has touched even weekly pivot points then market close below/above weekly pivot and during of week after that reaches support2/resistance 2– it could tell trend reversal;

15. If market reaches upward 0.618 Fib extension target at the end of the week and next week’s pivot stands near close price – you may use price action around it as a filter – will market go to 1.0 extension or not. If market will move and hold above weekly pivot on Monday, then probably the next target is 1.0 Fib extension. The same is true for downward move.

16. Pivot point is a market sentiment indicator. If the market flirts with pivot but holds above it, then the market has bullish bias, if it moves below th pivot and holds there – bearish bias. Hence:

17. And the most important rule:

- NEVER STAND AGAINST THE PIVOT! –

If market is above the pivot – do not enter short, if it below it – do not enter long. This rule is applicable to corresponding time frame. If, say, market moves far above Weekly Pivot point and reaches Weekly Pivot resistance 1 or 2 – you could count on and wait for retracement lower to enter Long in terms of daily time frame (i.e. you should not enter short). But you also could do intraday bearish scalp trade – there is no problem with it.

Pipruit: Wow, I’ve thought that it will be simpler…​

Commander in Pips:
 Heh, son, you act like you want FX Warrant Officer Rank. There will not be simple topics ahead anymore.

Pipruit:
 You always know how to cheer us up, Commander. Thank you.​

Commander in Pips:
 You’re welcome. And now let’s shift to strategies.

Range trading with pivots

This strategy could be applied at relatively calm market and it’s based on points 4, 6 and 16 of our general rules.

We will mostly use weekly pivot points and sometimes monthly. So, here blue line stands for weekly pivot point, red line stands for weekly pivot resistance 1, lime line for weekly pivot support 1 and long gold line for monthly pivot.

Chart #1 | EUR/USD 4-hour chart and weekly pivot points
EUR/USD 4-hour chart and weekly pivot points - Forex School
Here you can see, that in the beginning of the week market has tested double support – WPS1 (Weekly pivot support1) and MPP (Monthly Pivot Point). And market has held above both of them (I will use some abbreviation if you don’t mind). It tells that first – monthly sentiment is bullish, second – according to rule 7 this could be just retracement in longer-term bull trend, because the market was held by WPS1 and did not move lower. So, as we know, market trades to the pivot in 70-80% of cases (rule 5), hence our next target with solid probability will be WPP (Weekly Pivot Point). So, that has happened – you can see, how WPP was a resistance first, but then market has moved above it. It tells that weekly sentiment also has turned bullish and market could reach potentially WPR1 (Weekly pivot resistance 1).

Akin situation you can see during the next week. We see a bull trend, but the market stands far above the WPP. According to Rule 5 we can count on retracement till WPP with 70-80 % probability – this is what we want! When market has flirted with WPP, tested WPS1 and returned right back – it tells that we can enter Long (bar with circle). Weekly sentiment is bullish, and potential target is WPR1. As you can see, market has hit it.

The same analysis could be applied to weekly chart with monthly pivots as well.

Pipruit: Interesting, but Commander – where we have to place stop-loss orders?​

Commander in Pips: Right question. Well, major approach to Pivot trading suggests using of Pivots just 1 time frame higher. It means that since we are trading at 4-hour chart we should use daily pivots and not weekly. AS you understand daily pivots are much closer to each other than weekly. That’s why classical approach tells, that you may place stop-loss order beyond the next pivot (conservative tactic) or the same pivot level (aggressive tactic). For instance, if you trade intraday charts and enter long from DPP (daily pivot point) then you can place stop below DPS1 or DPP. If you trade on daily charts and enter from WPP – place stop below WPS1 or WPP itself and so on. Applying WPP in such way will give you too far stop-losses that will make potential trades unattractive, so they hardly could be constantly applied to intraday trading for stop loss-placement. Still weekly pivots are much more important than daily ones, that’s why it seems that a better approach is to use them – just like support or resistance levels, which are known ahead of time.

Another problem with this major approach is that you never know – is it calm market or not, does market in directional move or not etc. So, it’s better to use Pivot points just as support and resistance lines, almost like Fib retracement levels. Yes, Pivots have some additional qualities, but in general they are just another excellent leading indicator.

Pipruit:
 So, it means that we should use it in some context, do we? And pivots are just a fragment in overall analysis?​

Commander in Pips:
 Absolutely. Will you buy or sell, just because of support or resistance? I think not. We should wait for some confirmation of this level that could come from some pattern, trend or something. Only after that we can pull the trigger and enter the market. So, the same is with Pivots. The only difference is that they could give us some additional clues about the overall situation. Hence you will place your stop-loss order depending on trigger that you follow. If this is candlestick pattern – you will use one rule, trend – second rule, Fib levels – another rule etc.

Trading breakouts of different pivot lines

As you know I’m not the big follower of breakout trading. In fact, all that we’ve discussed in topic dedicated to support/resistance line trading and rectangle trading is applicable to pivot trading. Pivots are just another sort of support and resistance, but they are support and resistance. Professionals rarely trade breakouts as the public does. If they expect some breakout - they prefer to have a position prior the breakout itself or open one on some retracement following the breakout to be a very wise rule – “Buy deeps and Sell rallies”. That’s why they are absolutely calm during the breakout and leave all turmoil to the public. Market makers also like it when the public trade breakouts, because the public open positions right before, at or right after the breakout. Thus lets market makers make some fakes to grab the public’s stops.

So, there are a couple of ways to trade breakouts – aggressive and conservative. The aggressive way assumes that you enter right at the moment of breakout, while conservative way suggests that you enter in the direction of a breakout during the first retracement back towards the broken line.

The aggressive way has only one advantage, compared to the second, conservative way. It allows you to take a position if the market will not show any retracement after breakout.

The second way is safer and closer to what professionals do. Also with the second approach you can place a tight stop. The weak moment is that sometime the market will not show this retracement and continue to move higher.

When you need to make such choice always follow the rule – “Loss of possibility is preferable to loss of capital”. From this standpoint the choice is obvious.

Pipruit:
 Your explanation is so logical and simple. Thanks.​

Commander in Pips: Ok. Now let’s discuss some technical momentum of breakout trading. As we’ve pointed out, the trading of pivots breakout has much similarity with trading rectangles. For that purpose we should look at couple of pivot lines as a rectangle, although not in term of price action but in term of borders placing. Say, WPP and WPS1, or WPP and WPR1 and so on. We need this for better explanation where to place stop loss order.

Chart #2 | 60-min EUR/USD and Weekly Pivots 
60-min EUR/USD and Weekly Pivots - Forex School
So, here we see how the market has broken WPP and then WPS1. During the first breakout – there was no retracement back, so if you are a follower of conservative approach, you had to skip the strong down move. If you’ve applied the aggressive way – then you have to place a stop above the middle level of the distance between pivot lines (like on rectangle breakout trading).

The second example is a breakout of WPS1. Here, if you apply conservative approach – you’ve gotten a perfect entry during retracement back to WPS1 (here it will act like resistance now) in a calm environment and also you can place tight stop – just above the broken line. Because if the market will return back, it tells that this was a false breakout. Applying the aggressive way here will lead to almost the same entry point, but your stop will be placed two times higher.

Pipruit: Hm. And why does applying aggressive way of trading mean we can’t place stop closely as with the conservative one – just beyond the broken line? In the first example we could do this.​

Commander in Pips: The reason for that is a growing volatility during breakout, because there are a lot of orders for execution that come around the border and if you place your stop too close – you could be stopped out occasionally and maybe not even stay in once. Here you see that it could be done during WPP breakout (first rectangle) by rearview, but in a real time environment you will not have enough confidence to do it. Also the aggressive way is very sensitive to false breakouts:

Chart #3 | 60-min EUR/USD and Weekly Pivots 
A solid probability of false breakout or piercing of some level - Forex School

See – the same as with any support/resistance or rectangles. Applying here the aggressive entry tactic will lead you to loss. Although, I have no doubts that you’re a very smart guy and possibly will move your stop to breakeven during the second breakout. Also, take a look – the market has shown a breakout just due to accomplishment of 1.0 Fib extension target. I just want to keep you up, so that you do not relax too much. Remember, we’ve discussed this already?

Pipruit: Yes, Sir. I do. If some target stands very close but beyond some level – there is a solid probability of false breakout or piercing of some level.​

Commander in Pips:
 Right. Here is the clue, by the way, how you can anticipate the breakout’s nature. If the market has shown breakout, hit the target and continue the move - then possibly this is a real break. If it returns right back – then it just has accomplished a Fib extension target.

Another important note about pivot breakout trading is to watch – does some strong Fib levels or common support/resistance stands near the pivot or not:

Chart #4 | 60-min EUR/USD and Weekly Pivots – Fake breakout due Agreement resistance
Fake breakout due Agreement resistance - Forex School
Here is the same chart as on #3, but now you can clearly see, that just above the WPP stands Agreement – a strong resistance area. Just to remind you is that an Agreement is a combination of a Fib extension target and a Fib retracement level in tight area. Here is 0.618 Resistance that coincides with 1.0 Fib extension.

Pipruit:
 Thanks Commander, I’m really forgotten that bit. Looks like I can’t relax even for 1 second during trading. Curious but my attention is sufficient only to current material that we study, and I do not think about other tools and how could I apply them in current situation. I am a bit upset.​

Commander in Pips:
 Don’t worry with that. This is just a lack of practice. When you start to apply all our methods in a calm environment in your trading room – you will be able to do that, and even better.

Pipruit:
 Commander, can we take a loss even if we apply the conservative entry tactic?​

Commander in Pips:
 Absolutely, because we always can take a loss. This is the market – probability business. It based not on each particular trade, but on probability. If some tool has positive math expectation function – you will make money applying it, although catch losses in a number of trades. But also if you will apply a tool with negative expectation function – you will gradually loss your money, although in some trades make profit.

Here is some additional advice to breakout trading:

1. Before entering the market be sure that beyond the border that you expect will be broken there are no strong areas of support/resistance, targets or oversold/overbought areas. They could lead to fake outs – as on chart #4.

2. Apply all tools that you know to make as safe an entry as possible and place as close of a reasonable stop as possible. This could be trend, oversold/overbought, patterns etc. Say, if the market shows upper breakout but hits overbought – there is great probability that this break will fail. Especially if it has formed a bearish engulfing pattern on the next day after the breakout (in terms of the daily chart).

3. Despite the way of entry you choose – you never know with certainty if the move will continue or not.

4. It’s better to stay aside of breakout trading during news or macro data releases, while this is not your trading strategy. Because this is really doom and gloom environment that leads to multiple spikes, fake outs and volatility increasing. So – always keep an eye on macro data time & date schedule.

Estimation of market sentiment with Pivot points

Well, partially we’ve talked about it already. So let’s shortly repeat the most important thoughts:

1. There is great probability that the market will touch the Pivot point during the trading period – WPP during the week and MPP during the month. We can say, that market tends to pivot’s first touch;

2. In the beginning of the period (week or month) – look how the market will behave around the pivot. If market flirts with it, moves above and holds – sentiment is bullish, otherwise – bearish;

3. Sentiment in the beginning of the period does not mean that it should hold constant during whole period. It could change, for example due to some data release;

4. Keep in mind the overall market environment. Let’s suppose that market’s solid long-term trend on daily chart. It means that usual price action – pivot touch & go. If it has not happened and market moved below pivot during current week – it does not mean that trend has been broken. It just tells us that that possibly the market has turned to deeper retracement to WPS1. The same is true for downtrend and WPR1. Here you should apply our rules 5,6,7, 11 and 14;

5. Don’t make application of Pivot too simple. This is not the rule as “market above the pivot – buy, and below pivot – sell”. Use it as a part of overall analysis.

Comments

extremerrage
7 years ago,
Registered user
very nice explanation :D
Robert Andrighetti
7 years ago,
Registered user
which is correct?

Hi Sive,

There are so many pivot points out there it seems everyone is different. The ones you say are way different from other sites that I check out. How do I know which ones are correct? Or if you can recommend any software that is good that would be great.

Thanks
Rob
Sive Morten
7 years ago,
Registered user
> Hi Sive,

There are so many pivot points out there it seems everyone is different. The ones you say are way different from other sites that I check out. How do I know which ones are correct? Or if y..

Hi Rob,
I use most well-known "classical" pivot points calculation. But in the next part you may read about other ways of pivot calculations that also used in practice...
I find for myself classical pivots as absolutely suitable. Still you may experiment with different types of pivots. I also provide the formulas for their calculation.
Bangla Forex Rider
7 years ago,
Registered user
hello sive
You said "Professionals rarely trade breakouts as the public does. If they expect some breakout - they prefer to have a position prior the breakout itself or open one on some retracement following the breakout to be a very wise rule – “Buy deeps and Sell rallies”.
Can you please explain those lines . i like to know what pro like you think before enter in a trade
Sive Morten
7 years ago,
Registered user
> hello sive
You said "Professionals rarely trade breakouts as the public does. If they expect some breakout - they prefer to have a position prior the breakout itself or open one on some retracement fo..

Hi Bangla,
unfortunately it is very difficult to explain with two words. Definitely speaking, I also trade breakouts, but I need some confidence that it will be definitely breakout.
How public trade breakout - usually for public breakout is any move beyond the previous extreme. But such approach has a trap - currently market very often shows failure breakouts (may be oftener than true breakouts) by some reasons. If you have read Fibonacci chapter - there is an explanation, when some Fib extension target stands slightly beyond previous extreme. Hence, market will show failure breakout, but public will eat it and will fall in trap.
this is just one of possible examples. So, to accept breakout you have to be sure that there are high odds of true breakout.
Or, as opposite way, you have to open position prior breakout by some context. We previously have discussed it in details in previous chapters.
Urum
6 years ago,
Registered user
Hello Sive

Thank you for this explanation. It's great and I really see it working often. And because of this I would like to know more about pivot points so I just wanted to ask you for any good educational materials that you recommend, for pivot points.

Thanks
Sive Morten
6 years ago,
Registered user
> Hello Sive

Thank you for this explanation. It's great and I really see it working often. And because of this I would like to know more about pivot points so I just wanted to ask you for any good educ..
Hi Urum,
Unfortunately, I do not know additional books dedicated particular to Pivot points. Here I've written practical application of them, as I use pivots. Probably you can try to find something by yourself, but I do not know the book on pivots that I could recommend.
If you will find something valuable - let us know.
Aucke
6 years ago,
Registered user
Hi Sive,

I don't quite get point 11 above ("You may understand why does the market take a directional move or retracement move by applying pivot points. If the market does not touch weekly pivot supports 1 in an up move on daily chart or pivot resistance 1 in a down move and weekly pivot point holds market – then the market isin a directional move. If the market reaches support 1 during up move or resistance 1 in a down move – hence, market falls into retracement.") - could you please explain what you mean there?

Thanks,
Aucke.
Sive Morten
6 years ago,
Registered user
> Hi Sive,

I don't quite get point 11 above ("You may understand why does the market take a directional move or retracement move by applying pivot points. If the market does not touch weekly pivot supp..

Hi Aucke,
if you will take a look at any daily chart of trended market and draw weekly pivot points, you'll see that very often pivot holds the price. I mean price just touches pivot - and continue move with trend. But, if on upward trend price moves below pivot - next destination is pivot support 1 (from pivots tool framework). It is treated that trend still intact, until pivot support 1 holds price. breakout of pivot support1 will be early sign of trend break.
Other words - if market falls into retracement on uptrend, very often pivot support 1 holds it. The same is true for downward trend, but on pivot resistance 1.

The total sense of these point is: pivots could help you to understand when retracement has started and whether trend still holds or not.
If market moves below pivot on long-term uptrend - then you can say that retracement has started. It will be still retracement until price holds above pivot support 1. Once it has been broken - this could be the sign of trend breakout and reversal.
fxboss
5 years ago,
Registered user
Hello Sive, very enlightening post. I have always wanted to trade using the no. 1 leading indicator (pivots) but had always had issues knowing which pivots to trade and how to trade them properly, Thanks for this post and especially the golden rule:

"Never trade against pivots"

I have a few questions though:
1. if in an uptrend, the price breaks R1 and retraces to test it, can I enter a long trade then targeting R2?

2. When trading using weekly pivots, should I also consider 200ema and monthly pivots, because I notice on my charts when i enter a trade at weekly pivot and target weekly R1, at times the 200ema and/or monthly pivot is before my R1 target, so should I just forget about them and focus on my weekly R1 target?

3. Can I trade multiple currencies? because I have heard it said in some forum that its not advisable as the profits gained from one pair, would most likely be lost on the other, and this leads to little or no net profits at the end of the day. But I have always felt if one had a strategy with 80% accuracy like pivots, then one could trade multiple currencies to boost profit, as at times if only one pair is traded, one may not have frequent trades and subsequently no take-home profits or money.

i hope the questions are clear enough, waiting for response....thanks.
Hamza Samiullah
a year ago,
Registered user
Good work..
One-fm
7 months ago,
Registered user
Pivot point is a great tool. Thanks

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