Beat the Market Makers: Profitable Pivot Point Strategies for Forex Trading

Are you looking to gain an edge in the competitive world of Forex trading? Mastering pivot point strategies can help you predict market turns and profit like the pros. This comprehensive guide will teach you everything you need to know about using pivot points to beat the market makers at their own game.

What Are Pivot Points and Why Are They Important in Forex Trading?

A pivot point is a technical analysis indicator used to determine potential support and resistance levels. It is calculated using the previous period’s high, low, and closing prices. The pivot point itself represents a potential turning point for the market. The upper resistance and lower support levels indicate areas where the market could reverse.

Knowing potential pivot points allows traders to identify optimal entry and exit levels. By buying near support and selling near resistance, traders can profit when the market oscillates around the pivot. This is especially useful in range-bound markets that lack a definitive trend.

Pivot points appeal to forex traders because of the market’s tendency to respect key levels. With trillions of dollars traded daily, the forex market is prone to react to round numbers and self-fulfilling prophecies. Traders watch pivot points closely, creating a self-reinforcing effect when price reaches these levels. Pivots also represent key levels where buyers and sellers cluster, increasing the chance of a reversal.

Overall, pivot point strategies allow traders to capitalize on short-term oscillations. By properly identifying support and resistance, pivots provide an objectively calculated trade entry technique. This edge helps traders profit consistently, especially when used in conjunction with other analysis methods.

How Are Pivot Points Calculated?

The exact pivot point is calculated by taking the average of the high, low, and closing prices from the previous trading day, week, or month. This gives you the central pivot level. Then support and resistance levels are calculated based on set increments above and below the pivot point.

Here are the most common calculations for daily pivot points:

• Pivot Point (P) = (Previous High + Low + Close) / 3
• First Resistance (R1) = (2 x P) – Low
• First Support (S1) = (2 x P) – High
• Second Resistance (R2) = P + (High – Low)
• Second Support (S2) = P – (High – Low)

On a 5-minute EUR/USD chart, it would look something like this:

• High = 1.1250
• Low = 1.1200
• Close = 1.1225
• Pivot Point = (1.1250 + 1.1200 + 1.1225) / 3 = 1.1225
• R1 = (2 x 1.1225) – 1.1200 = 1.1250
• S1 = (2 x 1.1225) – 1.1250 = 1.1200
• R2 = 1.1225 + (1.1250 – 1.1200) = 1.1275
• S2 = 1.1225 – (1.1250 – 1.1200) = 1.1175

So in this example, the pivot would be at 1.1225, the first resistance at 1.1250, first support at 1.1200, second resistance at 1.1275 and second support at 1.1175

You can also calculate weekly or monthly pivots to get a bigger picture overview of the key levels in a longer time frame. The concept is the same, you just use the high, low and close from the previous week or month rather than day.

Main Pivot Point Strategies for Forex Traders

Now that you know how to calculate pivot points, let’s look at some proven forex trading tactics:

1. Trade the Bounce Off Pivot Levels

One of the simplest and most common pivot strategies is to buy near support levels and sell near resistance. This means entering a long position when price pulls back to a level of support and entering a short position when the price rallies to a level of resistance.

The key is waiting for confirmation that the pivot level will hold. For example, you may wait for a bullish engulfing pattern on the candlestick chart before buying at support. Or you may wait for a bearish shooting star candlestick before selling at resistance. This helps confirm the potential reversal.

By properly identifying support and resistance, you increase your odds of success. The pivot levels serve as clear price targets for planning both entries and exits. For example, you can place a stop loss below support on buys or above resistance on sells. The pivot points provide objectively calculated levels for defining risk.

2. Trade the Breakout Above or Below Pivot Levels

Another pivot trading tactic is to buy breakouts above resistance or sell breakouts below support. A breakout signals a potential continuation of the trend rather than a reversal.

For example, if the price breaks above an important resistance level with high volume, it signals the resistance has been broken and upside momentum is likely to continue. You would enter a long position after the breakout candle closes above resistance.

The stop loss would go below the broken resistance level. You aim to ride the momentum higher, exiting after a subsequent resistance level is reached or after the rally loses steam. The same concept applies in reverse with downside breakouts below support.

3. Combine With Chart Patterns or Other Indicators

For higher probability trades, pivot points can be combined with classical chart patterns like triangles, head and shoulders, flags and wedges. These patterns often emerge around key pivot levels, signaling high likelihood reversals.

For example, a bullish flag pattern on the hourly chart combined with the price bouncing off the daily pivot support provides a high probability buy signal. You gain confidence that the pattern will play out successfully because it is forming at an already influential price zone.

Pivot points can also be used with other indicators like the stochastic oscillator. For example, you may buy near pivot support only if the stochastics are oversold as well. This adds confirmation that a reversal is imminent. Combining analysis methods improves accuracy.

4. Look for Confluence at Multiple Pivot Levels

The more pivot levels clustering within the same price area, the stronger the expected support or resistance. For example, if the daily, weekly and monthly pivots are all near 1.1700 in the EUR/USD, expect major resistance. The greater the confluence, the higher the probability of reaction at that price zone.

You can also look for clustering of different types of pivots, like monthly pivots combined with Fibonacci retracement levels based on monthly charts. When key levels from multiple analysis methods align, it creates a super-high probability trade zone.

5. Use Pivot Points to Gauge Trend Strength

Monitoring where the price is relative to pivot levels helps determine trend strength and exhaustion. For example, if the EUR/USD is staying consistently above the R1 and R2 resistance levels, it signals an upward trending market. As long as buyers keep defending the pivots, you focus on long trades.

However, if the price breaks below R1 and then S1 support on high volume, it signals weakening upside momentum. This could be an early warning sign of a trend reversal lower. Being aware of how the price interacts with pivots allows you to gauge shifts in supply and demand.

6. Trade Pivot Point Bounces in Both Directions

Skilled traders use pivot points to profit from gyrations in both directions. For example, they may sell near R1 resistance with a take profit slightly below the pivot point. If the price reaches the profit target, they then look to enter a long position near S1 support with a take profit at the central pivot.

This allows nimble traders to harvest profits from the inevitable oscillations around influential levels. It requires discipline to book profits quickly and reenter in the opposite direction. However, this is a proven method for experienced traders to consistently profit from range-bound price action.

7. Trail Stops Based on Pivot Levels

Pivots can also be used to trail stops and protect profits after entering a winning trade. For example, if you buy near S1 support, you may move your stop to breakeven once the price reaches the central pivot point. You can then trail the stop higher as the price reaches subsequent resistance levels.

This “levels trading” approach allows you to lock in gains as the market swings in your favor. Even if the trend eventually reverses, you exit with a profit according to your predefined plan based on the pivots. This is a conservative approach but it enables consistent success.

Common Questions About Pivot Points:

What time frames are most useful for pivot points?

You can calculate pivots on any time frame from 1-minute charts up to monthly. Which you focus on depends on your trading style:

• Intraday scalpers – 5 min, 15 min, 30 min, or hourly
• Day traders – hourly and 4-hour
• Swing traders – 4 hour and daily
• Position traders – daily, weekly and monthly

Generally, the longer the time frame, the more significant the pivot levels. Many traders look at both short and longer term pivots for a complete picture.

How many pivot levels should you use?

Most traders focus mainly on the central pivot and the first support and resistance levels (S1, R1). The second levels (S2, R2) sometimes provide additional insight. Beyond that provides diminishing returns and potentially more noise than signal. Keep it simple when starting out.

What are the best pivot points indicators for MT4 and MT5?

The MetaTrader platforms have built-in pivot point indicators you can directly apply to the chart. There are also custom indicators available for download, such as the Easy Pivot Points indicator which automatically plots multiple pivots. Test different options to find what works best for your trading system.

What markets besides forex can you trade pivot points?

Pivots can be used in any liquid market including commodities, stocks, indices, cryptocurrencies, and more. The concepts are the same – trade the bounces and breakouts while watching for reversals at key levels. Pivots are most useful in trending or range-bound markets.

What trading session is best for pivot points?

Pivots tend to be most relevant during the volatile London and New York sessions. This is when you see the highest volume and most big players active in the market. Trades generally have the greatest chance of success between 8 AM – 12 PM EST.

Pro Tips and Tricks

• Watch price action at the pivot on lower time frames for additional confirmation before entering. Use 1-minute or 5-minute charts to pinpoint optimal entry timing.
• In range-bound markets, fade extreme intraday rallies by selling near the upper pivot resistance. Buy near the lower support to fade intraday drops.
• Focus on the daily pivots first. Then add weekly or monthly pivots to identify major support and resistance zones for the bigger picture.
• Beware of false breakouts. Let the price close decisively above or below a level on high volume before acting.
• When a key daily level fails, it signals potential exhaustion. Be nimble and adjust your bias.
• Pivots represent turning points insentiment. A surge above resistance shows increased optimism. Drops below support reflect increased pessimism.

Conclusion

Pivots provide objectively calculated, influential price levels to base your forex trading on. By combining simple pivot strategies with risk management, you can systematically identify high probability trade entries. Focus on the daily central pivot and support/resistance levels first, then add other time frames for greater context. Use the various pivot techniques discussed here to suit different market conditions. Practice is key – over time you will discover which strategies mesh best with your trading plan. Mastering pivot points is a key milestone for any serious forex trader.