Professional
traders and market makers use pivot points to identify potential support and
resistance levels. Simply put, a pivot point and its support/resistance levels
are areas at which the direction of price movement can possibly change.
The
reason why pivot points are so enticing?
It's because they are OBJECTIVE.
Unlike
some of the other indicators that we've taught you about already, there's no
discretion involved.
In many
ways, pivot points are very similar to Fibonacci levels. Because so many people
are looking at those levels, they almost become self-fulfilling.
The major
difference between the two is that with Fibonacci, there is still some
subjectivity involved in picking Swing Highs and Swing Lows. With pivot points,
traders typically use the same method for calculating them.
Many
traders keep an eye on these levels and you should too.
Pivot
points are especially useful to short-term traders who are looking to take
advantage of small price movements. Just like normal support and resistance
levels, traders can choose to trade the bounce or the break of these levels.
Range-bound traders use pivot points to identify
reversal points. They see
pivot points as areas where they can place their buy or sell orders.
Breakout traders use pivot points to recognize
key levels that need to be broken for a
move to be classified as a real deal breakout.
Here is
an example of pivot points plotted on a 1-hour EUR/USD chart:
As you
can see here, horizontal support and resistance levels are placed on your
chart. And look - they're marked out nicely for you! How convenient is that?!
Here's quick rundown on what those acronyms mean:
PP stands
for Pivot Point.
S stands
for Support.
R stands
for Resistance.
But don't
get too caught up in thinking "S1 has to be support" or "R1 has
to be resistance." We'll explain why later.
In the
following lessons, you will learn how to calculate pivot points, the different
types of pivot points and most importantly, how you can add pivot points to
your trading toolbox!
