Pivot Points in Markets

Pivot Points in Index Markets Image

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What is a pivot point?

A pivot point is a price level that is used by traders as a possible indicator of market movement.  The pivot point is calculated as an average of significant prices (high, low, close) from the performance of a market in the prior trading period.  

How is a pivot point used?

If the market in the following period trades above the pivot point.  It is usually evaluated as a bullish market, whereas trading below point is seen as bearish.

A pivot point is often a turning point for the direction of price movement in a market.  In an uptrend market, the pivot point and the resistance levels may represent a ceiling in price above which the uptrend is no longer sustainable and a reversal may occur.  In a declining market, a pivot point and the support levels may represent a low price of stability or a resistance to further decline.

How are pivot points calculated?

Several methods exist to calculate the pivot point of a market.  Most commonly, it is the arithmetic average of the high, low and closing prices of the market in the prior trading period. P=(H+L+C)/3.  The standard pivot point calculations also allows for three support levels below the pivot point (S) and three resistance points above the pivot point (R).

R1 = P + (P − L) = 2×P − L

S1 = P − (H − P) = 2×P − H

R2 = P + (H − L)

S2 = P − (H − L)

R3 = H + 2×(P − L) = R1 + (H − L)

S3 = L − 2×(H − P) = S1 − (H − L)

There are other methods for calculating pivot points, but the standard calculation is the one used by the majority of traders and institutions around the world.

What is the best pivot point indicator?

The best pivot point indicator is one that allows automatic correction of real market time on spread bet or CFD charts.

On some markets, such as indices, most spread bet or CFD brokers use algorithms to extend market opening and closing times.  Often this means that these market may have a larger range than the real market.  The pivot point tools that automatically calculate pivot points and draw them on chart for traders, use this extended data.  The large traders and institutions around the world are not trading spread bet charts and are just trading the real market data.  They therefore are using pivot points that may be different from those available on the spread bet charts.

Spread bet and CFD traders need to check if market they are trading has different closing times to the market that is available to them from broker.  If the trading times are different then the trader should ignore the automated pivot point levels and hand plot real market levels themselves.  This is particularly important for index markets.

Note: Market data displayed in Live Trade Room is real market data and therefore the auto pivot point indicators are correct.

Trade Room Plus Levels

We publish the daily pivot levels for the FTSE, DAX, DJI (Wall Street 30) and S&P 500 every day. Please click here. 

We recommend traders use this data to self-plot the pivots on the charts they are using.

Trading pivot points

Primarily in the Trade Room Plus live trade room we use daily timeframe pivot points for intraday trades on shorter timeframes.  We use them in three ways:

  1. Where a pivot level corresponds with another support or resistance level, giving us confluence, we will have greater confidence in placing a reversal trade.
  2. We consider a short term reversal at the pivot point.
  3. We consider a breakout trade to follow the short term reversal

The chart below shows how we actively used the pivot point levels to make a successful trade on the DAX. This trade was executed in the live room on 14/01/2016.

The 08:15-08:20 candle reverses off the S1 pivot level 9783 and following this move we placed an order short below S1 which was triggered by the 08:50-08:55 candle and move down 75 pts to our target set just above the 9700 level.

Pivot point trading on DAX

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Summary
What are pivot points in Forex, index and crypto markets?
Article Name
What are pivot points in Forex, index and crypto markets?
Description
A pivot point is a price level that is used by traders as a possible indicator of market movement. The pivot point is calculated as an average of significant prices (high, low, close) from the performance of a market in the prior trading period.
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Trade Room Plus
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