Pivot Points is a technical indicator commonly used within financial market to predict market movements based on previous prices.
Pivot Points is a technical indicator commonly used within financial market to predict market movements based on previous prices. In forex trading, it is one of the most widely used indicators, as it is not only could be used as a standalone indicator, but also could be easily combined with another indicators. If you would like to use pivot points in your trading strategy, there are various ready-to-use calculators and analysis based on pivot points. Nevertheless, it is infinitely worthwhile to learn how to calculate it yourself.
The Main Key
Standard pivot points are calculated using high, low, and closing prices from the previous period. Check the candlesticks in your chart, then afterward you can count it manually as follows:
The pivot is the main key here. The common practice is using prices from previous trading day. However, you could opt smaller time frames, as in H1, or any other time frame that suits your trading plan.
After finding pivot level, some traders are immediately using it to predict the trend and combine it with some other indicators to complete their strategy. If price opens under that level, then it means the trend is bearish. While if price opens over that level, then the upcoming trend will be bullish.
Support and Resistance
However, some other traders also calculate resistance and support levels. They don't have much use for pivot by itself as it is just one level that could be easily crossed. And so, they try to map future price movements by creating an area using support and resistance levels. Support and resistance levels are calculated using the following formula:
- Resistance 1 = (Pivotx2) - Low
- Resistance 2 = Pivot + (High-Low)
- Support 1 = (Pivotx2) - High
- Support 2 = Pivot - (High-Low)
That was quite simple, wasn't it!? More so, the use of pivot points is relatively flexible. Personally, I used only three levels: Resistance 1, Pivot, and Support 1, and combined it with fundamental analysis. I have strong fundamentalist tendency, but pivot points made it more balanced by providing sufficient technical analysis.
The way you interpret those levels is equally versatile. There are also traders who think the trend is going to the opposite direction. Meaning, if the price opens under the pivot, it is going to go up, while if the price opens over the pivot, it is going to go down. That was a bit dicey, but my point is, what you do with it is up to you.
Woodie Pivot Point
As mentioned above, the common practice is using prices from previous trading day to find pivot. However, Woodie incorporates opening price too. For example, you want to calculate pivot for 23 January 2014. If you count it using the usual way, you calculate prices from 22 January only. But in Woodie, you discard the closing price of 22 January, and enter opening price in 23 January instead. The calculation formula is as follows:
Pivot = (High+Low+Opening+Opening)/4
By doubling the opening price, Woodie accentuate the role of opening price in predicting market movements. What you do next is finding support and resistance levels, mark those levels, then you are set to go.
Before applying pivot points (or woodie) in your forex trading, let me remind you of one thing. Pivot point is a daily indicator; which means you should recalculate it the next day. So, now you have learned the basics of pivot points. Like I've implicated before, there are many variations involving pivot points. Just try the basics first, then customize it to your trading style and plan. Well, then, good luck in your trading.
Previous articles in this series:
- Basic Principles of Technical Analysis
- Predicting Trends Using Stochastics in Forex Trading