Pivot points are still one of the tools trusted by many investors. Known for its feature of identifying important support and resistance levels on price charts. Although popular, the actual way to apply pivot points is quite complicated. This Forex Trading article will help you better understand what advanced Pivot is and how to use it in trading.
What is Pivot Point?
The pivot point is also known as a pivot point. Considered a point in the price chart where the price can react and change direction. Pivot points have emerged as a powerful technical analysis tool, helping investors identify potential support and resistance levels for a financial asset over a specific period.
A special feature of Advanced Pivot is the ability to calculate based on price data from the previous trading session. It includes the opening price, closing price, highest price, and lowest price. Thanks to that, this tool accurately reflects past market movements. Create a solid foundation for predicting future trends.
In financial markets, Pivot Points act as an RSI divergence strategy. It helps investors predict price trends within a certain time frame. To draw Pivot Points on the chart, we need to use the opening price, highest price, and lowest price information of the previous time frame.
See more: Be more successful through this technical analysis
How to determine Pivot point structure
Pivot points play an important role in technical analysis. It helps investors predict price trends and make effective trading decisions. To understand how the Pivot point works, we need to master its structure and calculation method.
Pivot points act as landmarks, helping investors identify trend reversals. It includes 3 main components:
- Mainline (PP): The central pivot point, calculated based on the highest, lowest, and closing prices of the previous trading session.
- Support level: Includes S1, S2, and S3 below the PP line. This is considered a price range where buying pressure can increase, causing prices to tend to recover.
- Resistance level: Includes R1, R2, and R3 located on the PP line respectively. This is considered a price range where selling pressure may increase, causing prices to tend to decrease.
Advanced pivot scoring formula
Advanced pivot points are calculated based on the average value of the highest price, lowest price, and closing price of the previous trading session, expressed through the formula:
Pivot Point (PP) = (High price + Low price + Closing price) / 3
From this Pivot point, we can identify important support and resistance levels in the current trading session, calculated according to the following formula:
Support level:
- S1: 2 x Pivot Point – High price of the previous period
- S2: Pivot Point – R1 – S1
- S3: Pivot Point – R2 – S2
Resistance level:
- R1: 2 x Pivot Point – Low price of previous period
- R2: Pivot Point – S1 + R1
- R3: Pivot Point – S2 – R2
Advanced pivot trading strategy
Join Forex Trading to learn some strategies with Pivot.
Determine the state of the price with Pivot points
When prices move to support or resistance areas, there is a high tendency for prices to reverse in these areas. Investors can take advantage of this feature to make appropriate trading decisions.
To ensure safety and increase success rate, priority should be given to using strong support/resistance lines. These are price lines that the price has repeatedly touched in the past but cannot break.
Pivot chart trading strategy when breaking out
When prices break out of support and resistance zones, signaling the potential for a sharp increase or decrease, investors can apply a trend-following breakout trading strategy to capture opportunities.
How to enter orders:
First:
- Buy order: Placed when the price surpasses the resistance levels R1, R2, and R3 and continues to go up.
- Buy point: The candlestick position is broken or after the price breaks out and returns to test the recently broken resistance level. This method helps limit false breakouts, but you may miss the opportunity if the price does not turn around and continues to increase.
- Stop loss: It is located below the broken resistance line.
- Take profit: At the next resistance levels (R4, R5,…).
Sell:
- Sell order: Placed when the price penetrates the support levels S1, S2, S3. And it continues to go down.
- Buy point: The candlestick position is broken or after the price breaks out and returns to test the support level just broken. This method helps limit false breakouts but can result in missed opportunities. In case at that time the price does not turn around but continues to decrease.
- Stop loss: It is located above the broken support line.
- Take profit: At the next support levels (S4, S5,…)
Central Pivot Point strategy
Based on the price position compared to the technical analysis line (PP), investors can evaluate the advantage of the buyer or seller to make a trading plan as follows:
- When the price rises above the PP line, it shows that buyers are controlling the market. Traders can consider placing buy orders
- When the price goes above the PP line and goes down, it shows that the sellers have the upper hand. Traders can consider placing sell orders
- The entry point is determined at the position where the price breaks out of the PP line. After the candle confirms the trend after the Breakout
- With a sell order, the stop loss is placed above the PP line. For buy orders, the stop loss is placed below the PP line
- When taking profits, investors can consider the next resistance/support zone, consistent with the direction of the buy or sell order.
Combine Advanced pivot with reversal candlestick pattern
Support and resistance zones are created by the PP (Pivot Point) line. It plays an important role in predicting price reversal trends. The possibility of a reversal is further reinforced when signaling candlestick patterns appear.
Trading strategies:
- Identify support or resistance zones: Observe the price chart to identify price zones where prices have had a tendency to reverse in the past. The PP line provides potential support/resistance levels based on price turning points.
- Wait for the candlestick reversal pattern: When the price moves to the support/resistance zone. Watch for candlestick patterns signaling reversals. Such as Bullish Engulfing, Bearish Engulfing, Hammer, Hanging Man, Morning Star, Evening Star,…
Enter command:
- Buy: When the bullish candlestick reversal pattern appears, place a buy order at the candlestick’s closing price
- Sell: When the bearish candlestick reversal pattern appears, place a sell order at the candlestick’s closing price
Stop loss:
- Buy: Place stop-loss below the nearest support line.
- Sell: Place stop-loss above the nearest resistance line.
Take profit:
- Buy: Take profit at resistance levels R1, R2, R3.
- Sell: Take profit at support levels S1, S2, S3.
Use a combination of Pivot point and MACD indicator line
In the trading strategy, break out from support/resistance zones and combine with the MACD indicator line. Traders can confirm the price trend as follows with Advanced pivot :
- When the price breaks out of the R1, R2, and R3 thresholds and the MACD signal. It confirms the bullish trend by crossing the Pivot Point line from below. The Histogram chart moves above the zero axis, investors can place buy orders.
- When the price breaks out of the thresholds S1, S2, S3 and moves down. The MACD signal confirms the price downtrend when it crosses the Pivot Point line from above. The Histogram chart moves below the zero line, investors can place a sell order.
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Instructions on how to trade with Advanced pivot
Once we have a clear understanding of Advanced Pivot points and how to calculate them, we have also identified support and resistance levels. This implies that pivot point trading is essentially trading based on support and resistance levels. Therefore, to trade with Advanced Pivot, investors only need to apply trading methods appropriate to each situation such as Breakouts and reversals, taking advantage of buying and selling opportunities at support and resistance points.
Trade Advanced pivot when the market is moving sideways
When the market is in a period without a clear trend the price fluctuates in the range between support and resistance levels. One strategy could be to place a BUY order at support and a SELL order at resistance. In this case, it is necessary to place Stoploss below the support line for BUY orders and above the resistance line for SELL orders to protect the account from market risk.
Trade Pivot Chart when the market breaks out
In this case, you can choose one of two approaches:
Place a BUY stop/SELL stop order a certain distance away from the resistance/support level. Then take profit when the price approaches the nearest support/resistance level.
Or you can wait until the price recovers, then place an order. Finally, you can take profits when the price approaches the nearest support/resistance level.
Trade Pivot points when the market reverses
In a market reversal situation, this is the time to carefully consider and monitor many factors. You need to wait and only make trading decisions when there are appropriate signals.
In the example below, the price is in an uptrend and has crossed above the Advanced pivot line. However, when reaching the resistance level R3, a pair of strong reversal candles appeared. That shows signs of a potential reversal. You decide to place a SELL limit order at level R3, placing your stop loss higher than the top of the highest candle. And take profit at the nearest support level, which is the S1 line.
Summary
Above are shares from Forex Trading about Advanced pivot points: definition, calculation, and application in stock trading. However, investors also need to remember that combining it with other technical analysis tools is an effective way to minimize trading risks.
FAQs
Does the pivot point have any disadvantages?
Pivot points are technical indicators based on past price data, so they may lag current price movements. This means that the pivot point may not reflect changes in market trends promptly, leading to missed trading opportunities or losing trades.
When should you avoid using breakout trading strategies with Pivot?
You should use the pivot breakout trading strategy with caution and avoid using it in cases where the market is highly volatile, has important economic news, is in a clear trend, and has trading volume. low or when you don’t have enough experience.
How to analyze Pivot points in price charts?
- Uptrend: If the price is in an uptrend, watch for resistance levels. When the price reaches the resistance level, it can reverse and fall.
- Downtrend: If the price is in a downtrend, watch for support levels. When the price reaches the support level, it can reverse and increase.
- Breakout: If the price breaks a strong support or resistance level, it can signal a change in trend.
