Technical Analysis – Pivot Points

In the same category as classical support and resistance levels, pivot points are horizontal lines on the screen designed to offer either a stop loss or a take profit for a trade. A pivot point strategy is used mostly in scalping rather than swing trading or investing. The MetaTrader platform does not offer the Pivot Points indicator in its standard or default settings, but this should not be a problem for those who want to use it. Just create an account with the mql.com community (MetaTrader developers offer a wide range of trading tools from indicators to Expert Advisors, either for free or for a small fee) and search for the Pivot Points indicator to download onto the MetaTrader 4 platform. You’ll find plenty of offers available, and after downloading one onto your computer, it is time to instal it on the trading platform. This is even easier to do if you follow the steps below:

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This is not enough on its own, though. If you check on the MetaTrader platform under the Custom Indicators where the Pivot Points should be, you’ll be surprised that you don’t see it. The trick is to restart the trading platform, as only then will the platform  recognise the new indicator. It is as simple as that.

Trading with Pivot Points

Having explained the above, we’re not actually going to use the Pivot Points indicator from the MetaTrader platform, as this time we’ll be look at JForex instead. The reason for this is that the Pivot Points indicator is integrated into the standard offering on this trading platform, so we don’t need to follow extra steps to use it. In the list of technical analysis indicators, Pivot Points is offered under the Trend Indicators tab, even though we should know by now that it is not such an indicator, as while it is applied to the actual prices, like most of the trending indicators are, it is mostly used as an oscillator.

Limitations

There are some limitations to the use of the Pivot Point indicators. The most important one is the fact that it cannot be applied on the longer timeframes. To tell the truth it can, but it is useless, as it refers to levels formed around current prices. As a result, if the indicator is applied to the monthly chart, or even the daily and weekly ones, there will be only a few lines visible, without the possibility of actually seeing the levels and interpreting them. If we go on the shorter timeframes, the levels shown by the indicator can be seen. The image below shows the info and levels offered by the Pivot Points indicator after it is plotted on a chart.
Pivot Points -1
As you can see, we’re talking about some levels that are supposed to offer support and resistance for the future moves the market will make. Keep in mind that these levels are calculated starting from the current price, and, as a consequence, will change with every candle that closes. If the indicator is applied to the hourly chart, as each hourly candle is closed the indicator will show different values for the support and resistance levels; and by different, I mean new ones. On the other hand, if the indicator is applied on the 4-hour timeframe, the indicator will keep the support and resistance levels at the same levels until the 4-hour candle is closed. This means that the levels are projected based on the previous candle. Having that in mind, the longer the timeframe, the more powerful the support and resistance levels given by the Pivot Point indicator are. However, these are only horizontal or classical support and resistance levels, not dynamic ones. For more about dynamic support and resistance areas and in comparison with classical ones, please see the previous article here on the Trading Academy. As a short reminder, dynamic levels are more powerful in the overall picture than classical ones are.

How to Use the Pivot Points Indicator

It all starts with the level in the middle of the range. The indicator projects seven levels: three to the upside of the chart and three to the downside, and the one in the middle, which is the pivot level. In the picture above, it is the light blue line, and it is the most important line of them all. As long as the price is above it, the tendency is to look for the three levels above as possible places where price will meet resistance. This means that either bulls will have to set the take profit level at those levels, or bears who want to fade a move higher will use them for entering the market. The opposite is true on the downside: If and when the price moves below the pivot line as depicted by the indicator, the three levels below represent support. At these levels (there is a clear value shown by the indicator for every level that is part of the Pivot Points indicator), bears are likely to close their shorts, and bulls who bet on a reversal will look for a bounce. The indicator marks the above levels with R1, R2, and R3 as three different resistance levels, and with S1, S2, and S3 as three different support ones. The first one is the easiest to be broken, while the last one is the most difficult to pass by. Traders use scaling techniques with the Pivot Points indicators, especially those who look for trend reversals. To give you an idea, these traders use Japanese candlestick techniques or other reversal trading strategies and patterns to spot potential turning points in a trend. These turning points are not some fixed level, but rather an area, and the idea is to create an average for the overall position. This average is obtained by entering at different levels. The Pivot Points indicator is great for averaging an entry. This is just an example of how the indicator can be used. Keep in mind that swing traders and even investors can use it, even though the analysis might come from the longer timeframes. The way to use it is to go down the shorter timeframes to time the entry, and this is where the indicator comes in and makes a difference.

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