How to Use Pivot Points: Entry Strategies for Any Market Direction

Professional traders and those with experience often use Pivot Points to identify potential Support and Resistance levels. Why are these Pivot levels so popular? The answer is that they are relatively objective compared to other leading indicators.

What is Pivot Points?

Essentially, a Pivot Point is a price level that can act as Support and Resistance levels over a certain period.

Below is an example of Pivot Points and SR (Support - Resistance) levels on the EUR/USD chart with a 1-hour timeframe (H1). PP is the Pivot Point, R1 is the first Resistance level, R2 is the second Resistance level, S1 is the first Support level, S2 is the second Support level, and the subsequent levels.

To identify Support and Resistance levels, we first need to determine the Pivot Point. The Pivot Point is calculated based on the high, low, and close prices of the previous day. Typically, traders use the closing price of the New York session as a reference, which is at 4:00 PM EST (around 4:00 AM Vietnam time).

Below is the formula for calculating the Pivot Point:

Pivot Point (PP) = (High + Low + Close) / 3

First Resistance Level (R1) = (2 x PP) – Low
First Support Level (S1) = (2 x PP) – High
Level R2 = PP + (High – Low)
Level S2 = PP – (High – Low)
Level R3 = High + 2 x (PP – Low)
Level S3 = Low – 2 x (High – PP)

In Pivot Points, there are also Intermediate levels (mid point levels), which are the levels between PP and S1, S1 and S2, S2 and S3, as well as between PP and R1, R1 and R2, R2 and R3.

Intermediate levels are reference points often used when the distance from PP - S1 or from S1 - S2 and subsequent levels is quite large. Price movements often bounce at these intermediate levels (as illustrated in the example above). When traders use Pivot Points, intermediate levels are often seen as mini Support or mini Resistance.

It is important to note that you do not need to manually calculate PP or the Support and Resistance levels for every trade, as most trading platforms now have a built-in Daily Pivot indicator, including the popular MetaTrader platform. However, you must ensure that the closing time based on the reference time matches the market closing time used by your broker.

Pivot Points for Bounce Trading

A simple way to trade using Pivot Points is to consider these Pivot levels as Support and Resistance levels. Typically, the price will test these levels before bouncing or breaking. In practice, the price may test these levels multiple times. Since they act as Support or Resistance (SR), the fundamental characteristics of SR also apply. The more times the price cannot break a level, the stronger that Support or Resistance level becomes.

By using Pivot Points on the trading platform, entry opportunities are created when the price is at one of these Pivot levels, regardless of whether you predict the price movement will bounce or break. The following example shows a buy order at the Support level, assuming that when the price cannot break Support, a bounce will occur.

The target profit level can be set at PP (Pivot Point) or R1 (first Resistance level), or between these levels, depending on the desired Risk/Reward ratio. If you are an aggressive trader, the Stop Loss can be set a few pips below S1 (first Support) to create a high Risk/Reward ratio. However, conservative traders will set the Stop Loss below S2 (second Support) with the assumption that if the price breaks S1 but does not break S2, there is still a chance of a bounce occurring.

The next occurrence is: the price movement has bounced at S1 and PP.

To increase confidence when entering a trade, use additional technical indicators as confirmation tools to assess the strength of the SR levels, as Pivot Points are essentially Support and Resistance levels. Additionally, you can observe candlestick patterns and Price Action setups.

Pivot Points for Breakout Trading

Bounce trading using Pivot Points does not always work effectively, especially when the SR levels are quite strong. Particularly at the opening of the European or New York session, price movements often break through Pivot levels. This also occurs when market sentiment is strong, such as when important economic data is released. Below is an example of price movement breaking through Pivot levels:

From the above image, it can be seen that market sentiment is strong with the opening price above PP. In the subsequent movement, the price breaks R1, R2, and R3 before breaking R3 again and bouncing at R2. For aggressive traders, such market conditions are certainly very advantageous.

It is important to note that: before actually breaking a Resistance level, the price often performs a retest at that level. Observe the retests at the round marks in the above image. Again, to increase confidence, you can observe Price Action setups and candlestick patterns that appear, as well as use technical indicators for further confirmation.

Pivot Points for Stop Loss and Target Profit

If you tend to trade aggressively and use the breakout method, the challenging part may be determining the Stop Loss or risk level. In the conservative trading method using Pivot levels (bounce method), the risk is often set a few pips above or below the previous pivot levels. However, if you use the breakout method, determining the Stop Loss level this way may require many pips, or in other words, create too large a risk.

In the above example, if you enter a buy order around the breakout area A, then the Stop Loss can be set at the Intermediate level or at the lowest point of the previous candlestick bar. If you are accustomed to observing candlestick patterns or Price Action setups, you can determine the Stop Loss based on the bar patterns that appear. Aggressive traders often try to keep the risk as small as possible to achieve a reasonable Risk/Reward Ratio.

To determine target levels, you can use the same method as in bounce trading, which is to set targets at the next Pivot levels. You can set targets at 2 or 3 Pivot levels above the entry level to achieve a large Risk/Reward. However, the market rarely moves beyond 3 Pivot levels at once, unless the market is in extreme conditions. Generally, price movements will often pause at a Pivot level before continuing to the next level. If market sentiment changes, the price can immediately reverse. In this case, a stop loss should be used.

Pivot Points as a Market Sentiment Indicator

Market sentiment in this context is understood as the trend of price movement in a bullish or bearish direction. A common reference point used is the opening price of that trading session and the Pivot Point calculated based on the price range of the previous day.

For example, if in the Asian session, the opening price is above the Pivot Point, then the sentiment in that session will tend to be bullish. However, the situation may change in the next session (such as the European session) depending on how the price moves at that time compared to the Pivot Point. The same applies to the subsequent New York session.

In the above image, it can be seen that the price movement creates a gap above the Pivot level. This gap indicates a fairly strong bullish sentiment. After that, the price movement continues to break through R1, R2, and R3.

In the above GBP/USD example, the opposite occurs. After testing the Pivot level, the price drops sharply (represented by a longer bearish full body candlestick) and breaks through S1 and S2. Although the characteristics of price movement relative to Pivot Points are not always the same, market sentiment still tends to react around the Pivot level.

The above example shows a bearish price trend (1) and a slow movement in the Asian session and temporarily tests S1. However, in the European session, the price rises sharply to R2. At this time, pay attention to the bar pattern when the price breaks the Pivot level (3). It can be seen that the closing price of that bar is above the Pivot.

From the explanations above, it can be concluded that Pivot Points are a multifunctional trading tool with high reliability in various strategies. However, due to the somewhat complex nature of this system in interpretation, beginners should practice and learn how to apply them on a demo account first.

Tips for Using Pivot Points

There are many functions that you can leverage from Pivot Points to support your trading needs. Below are a few tips when using Pivot Points in Forex trading:

1. Use Pivot Points on a timeframe that suits your trading strategy, for example: Daily pivots for short-term trading.
2. When the market is more volatile, the pivot levels may be tested more frequently, so you need to be more careful when setting stop loss.
3. If the price breaks a resistance or support level, it may indicate the possibility of a breakout.
4. Combine Pivot Points with other indicators (e.g., RSI or MACD) to confirm entry or exit signals.
5. If the market is trending (e.g., uptrend or downtrend), Pivot Points can be used to find pullbacks at support or resistance levels to enter trades in the direction of the trend.
6. Pay attention to price movements as they approach the main Pivot Point (PP). If the price approaches PP and moves in the same direction as the current trend, this may be a signal for trend continuation.
7. An increase in volume at certain pivot levels can help increase the accuracy of support or resistance signals.

Conclusion

Pivot Points are particularly useful for short-term traders or day traders looking to take advantage of relatively small price movements. Similar to other trading methods based on Support and Resistance levels, traders can apply the concepts of bounce and breakout at these levels.

With the bounce method, traders try to identify reversal levels. Meanwhile, traders who prefer breakouts will use SR levels as reference points for breakouts. They will then open buy or sell positions near these levels.