We all know big banks move the markets. They have at their disposal access to a tremendous amount of capital so when they act in the market it’s always apparent by the huge spikes in price action or reversals in trends that we see. They are the market makers, the driving force behind price action that all of us retail traders try to hitch a ride on each day. But banks must follow strict regulations and guidelines before taking a position in the market, thus banks can’t trade on a whim like you or I. Their trading systems are methodical and mechanic and pivot points are a big part of their strategies. So therefore you as a retail trader must be aware of how to use them in order to understand what the big players are thinking.
Now you can think of pivot points as being another support/resistance line on your graph. But the difference with pivot points from your own support/resistance lines is that pivot points are predictive lines. To put it another way, the support/resistance lines you draw are based off of swings in price action that have already occurred where the price went up or down to a certain level and then sharply reversed its direction, so based off of that you can assume it will happen again at that same level. With pivot points you see lines drawn at the beginning of the week where price action is more than likely going to meet up with support or resistance, even though it hasn’t happened yet. These lines should not be considered too definate because price action might pass through the actual line or not even quite touch it. Here’s an example…
There are also daily pivots, although I wouldn’t place as much weight on them as weekly ones. That’s because news events and other technical indicators can nullify their importance. While I don’t typically put much importance on them, many other traders will say they use them quite a lot. If you’re using daily pivots there is also median, or mid way point, between the support and resistance lines indicated by a dotted line. I only use daily pivots whenever they line up with either a weekly pivot point or a support resistance line that I draw on my chart, since that adds more significance to that area of the price range as being a point of interest.
Now I’m going to skip how you calculate these lines because that gets done automatically by the indicator on your platform. Instead I want to give you the short and sweet rules for applying them to your own trading strategy.
There are 3 support and 3 resistance lines that you will see, referred to as S1, S2, S3, and R1, R2, and R3. But the most important ones are the weekly pivot (pink) S1 (blue) and R1 (red). Again these are not to be considered “lines in the sand” across which the price action shall not pass. Rather, they are very predictive of what regions to expect to see resistance or support begin to form. Look at this example from the EUR/USD.
Another thing to be aware of is the importance of the weekly pivot line. Most traders will agree that if price action begins the week above it then you should expect it to be a bullish week, and the reverse is true if price action starts the week out below it. But that’s VERY basic and not of much use since the fundamental forces in the markets can change all of that in one day. I only use pivot points as more of a suppliment to my other indicators, meaning if they agree with what my other indicators are telling me the I can enter a high probability trade and perhaps trade a larger lot size with a tighter stop loss. For example, if I see that price action has been moving up and is approaching not only R1 but also my envelope band as well, then I would enter a sell order as close as I can get to that level where the two lines intersect. Where you see your envelope bands and pivot points intersect, you can safely bet it’s a reversal coming (intersection of your horizontal pivot line and diagonal envelop line). That’s because two indicators are in agreement that price action is approaching an area of strong resistance. See image below.
Generally whenever a move starts at S1 it will go up to R1, or if it begins at R2 it travels down to S2. The medians are a little different because a move that starts at M1 usually ends at M3, M2 to M4. So with Medians you skip one M1 to M3. Generally start at a pivot, end at a pivot and start at a median, end at a median.
Also check out my video demonstrating how I use pivot points to trade the EUR/USD.
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