What is pivot? How many Pivot Points are there and how to use them to increase investment efficiency? Let’s Forex Trading learn about the definition, calculation, and trading methods with common pivot points in the following article.
Learn about what is pivot.
What is pivot? In stock trading, identifying key support/resistance levels and predicting turning points of the general trend is very important. Pivot points are a tool that can help traders calculate these important psychological thresholds.
What is pivot?
A pivot point means a pivot point. Pivot points mark the price position at which the current trend is likely to reverse. This means that at the pivot point, an uptrend can change to a downtrend and vice versa.
How to calculate points What is pivot? Pivot points are calculated by averaging the highest price, lowest price, and closing price of the previous trading session. Through Pivot points, traders can identify support and resistance levels in the current trading session. This tool not only identifies reversal points but also predicts the next price trend.
See more: Be more successful through this technical analysis
Advantages and disadvantages of Pivot points
Pivot points are a useful tool for predicting price trends. However, to maximize the use of pivot, let’s find out the advantages and disadvantages of What is pivot.
Advantage:
- Pivot points can identify important price levels. Traders can thus decide when to enter and exit orders. When the price crosses the pivot line, the selling trend is increasing. At this time, traders should consider selling or closing the buy order. Conversely, when the price is below the pivot point line, the buying trend will strengthen. At this time, traders should consider buying or closing sell orders.
- Pivot has the ability to identify support and resistance zones. Traders will predict the trend reversal point.
- Pivot points are considered a technical analysis tool applicable to all time frames.
- Pivot points can be combined with MACD or RSI to increase the likelihood of trading success.
- Thanks to its ability to accurately calculate short-term highs and lows, Pivot Points are effective for both scalping and trend trading.
Defect:
- The reliability of the pivot signal decreases when the price range is narrow.
- When the price range is too wide, the pivot point cannot accurately predict the price signal of the following time frame.
- Sharp variations in the distance between support and resistance lines can make it difficult to determine a stop loss point. The standard R:R ratio will not be guaranteed when using pivot points to cut losses.
Meaning of What is pivot?
In investing, what is the meaning of What is pivot? Consider the following use cases of Pivot:
- Helps identify potential pivot levels during the current trading day.
- Helps identify potential breakout points or trend reversals. Once one of the support/resistance levels is broken, the price will continue to increase/decrease until it reaches the next important level. While the price can return to the level of the previous trading session if the current trend reverses.
- Helps consider crowd psychology. For example, a trader’s concentration of profit orders at the R2 level during an uptrend according to Pivot Point can cause the price to reverse to this level. Pivot points do not predict trend reversals on their own, but it is the crowd behavior using this tool that creates buying and selling pressure, leading to price fluctuations at high and low levels.
- Helps traders identify potential locations to take profits or cut losses.
- Pivot combines with RSI, MACD, and volume,… to support trading according to important price zones and channel strategies.
The most used formula for calculating 3 pivot points
Note the abbreviations:
- PP: Pivot Point
- R: Resistance
- S: Support
- H: High
- L: Low
- C: Close
Classical pivot point calculation formula
- P = (H + L + C) / 3
- R1 = PP*2 – Previous L
- S1 = PP*2 – Previous H
- R2 = PP + (R1 – S1)
- S2 = PP – (R1 – S1)
- R3 = H+ 2(PP – L)
- S3 = L – 2(H – PP)
Camarilla pivot point calculation formula
- PP = (H + L + C) / 3
- R1 = C + ((H – L)*1.0833)
- S1 = C – ((H – L)*1.0833)
- R2 = C + ((H – L)*1.1666)
- S2 = C – ((H – L)*1.1666)
- R3 = C + ((H – L)*1.2500)
- S3 = C – ((H – L)*1.2500)
- R4 = C + ((H – L)*1.5000)
- S4 = C – ((H – L)*1.5000)
Formula to calculate Woodies pivot point
- PP = (H + L + C) / 3
- R1 = PP*2 – Previous L
- S1 = PP*2 – Previous H
- R2 = PP + (H – L)
- S2 = PP – (R1 – S1)
- R3 = H + 2*(PP – L)
- S3 = L – 2*(H – PP)
The most used 3 pivot points trading method
Let’s take a look at trading strategies using 3 pivot points: Classic, Camarilla, and Woodie.
How to trade with Classic points What is pivot?
Classic Pivot Points is a flexible tool. It allows users to freely configure and adjust to serve many different trading purposes. The Classic Pivot Points indicator can be adjusted to only display pivot points for the current trading session. This method is suitable for traders who like to play bare-handed and love minimalist charts.
The special feature of this indicator is the ability to customize the start of the day. When calculating pivot by day. You don’t need to limit yourself to the fixed time frame of 00:00 to 23:59. For example, when you set the start time to 17:00, the indicator will calculate the pivot point based on data from the 17:00 column onwards. This will be the opening time for the trading session of the day. Column 16:59 (next day) will be the closing time. In addition, you can also enable/disable the display of pivot points of previous trading sessions.
How to trade with Camarilla points What is pivot?
Camarilla pivot range trading strategy:
Camarilla pivot points provide new trading ranges every day. Therefore, this is a useful tool for traders when the market goes sideways. In the image below, traders should focus on price movements in the S3 to R3 zone if looking for a short-term reversal. Area S3 to R3 is the daily trading range.
If the price cannot overcome the resistance zone, traders should consider a short position near R3. In case the price is supported at the S3 Camarilla level, range traders will tend to open a long position near S3.
This strategy is most effective when applied during the Asian trading session. The reason is that this trading session has little fluctuations. When the market fluctuates strongly, you should pay attention to the Camarilla pivot trend strategy.
Strategy for trading according to the Camarilla pivot trend:
With trending markets, Camarilla pivot will help traders determine entry/exit points and set stop loss/profit orders. If the market is rising, you should buy at S3 and cut your loss at S4. In the chart below, AUD/JPY is trending up. The trader will therefore be able to decide to open a long position at S3 and stop loss at S4.
See more: Together XM Forex: Master the game, increase income
How to trade with Woodies points What is pivot?
Intraday Trading Strategy:
Woodies pivot helps identify price zones that tend to attract more trades in short time frames. Traders can rely on price fluctuations within a certain range to determine buying and selling points. The EUR/USD chart shows many potential signals to open a long or short position.
Momentum Breakout Trading Strategy:
Thanks to support and resistance levels, this strategy helps investors capture sudden price fluctuations.
The GBP/NZD chart below shows the price breaking out of its usual trading range, accompanied by strong upward momentum. This is confirmed by the green MACD histogram. After trading below the pivot point, the price suddenly increased sharply.
At R1, traders will observe the price reaction to consider the possibility of a reversal and create short trading opportunities. After overcoming R1, traders will be ready for a promising long trade when the price reaches R2.
You should place your entry point right above R2, and at the same time set a safe stop loss at R1 to limit risks in case the price reverses. R3 level is the ideal target, ensuring a positive risk/reward ratio.
summary
The article has provided information about the definition What is pivot, the calculation formula, and the trading strategy with the 3 most common pivot points. Forex Trading hopes readers will gain more useful information and apply it to their strategies. Don’t forget to follow our blog to update your new investment knowledge every day.
FAQs
Which pivot point is best?
Like other tools, Pivot Points are not absolute. Depending on the intended use and investment goals, traders will decide which tool is suitable.
Are Pivot Points accurate?
For short-term transactions, the pivot point will have quite high accuracy. However, in highly volatile markets, pivot points are not a strong tool to predict turning points.
What are the limitations of pivot points?
Pivot points were developed primarily for intraday and short-term trading. Therefore, this is not an ideal tool for traders to make long-term decisions.
