## Summary: Pivot Points

Pivot points are a technique used by forex traders to help determine potential support and resistance areas.

There are four main ways to calculate for pivot points:

1. Standard
2. Woodie
3. Camarilla
4. Fibonacci.

Pivots can be extremely useful in forex since many currency pairs usually fluctuate between these levels. Most of the time, price ranges between R1 and S1.

Pivot points can be used by range, breakout, and trend traders.

• Range-bound forex traders will enter a buy order near identified levels of support and a sell order when the pair nears resistance.
• Pivot points also allow breakout forex traders to identify key levels that need to be broken for a move to qualify as a strong momentum move.
• Sentiment (or trend) forex traders use pivot points to help determine the bullishness or bearishness of a currency pair.

The simplicity of pivot points definitely makes them a useful tool to add to your trading toolbox.

It allows you to see possible areas that are likely to cause price movement.

You’ll become more in sync to market movements and make better trading decisions.

Using pivot point analysis alone is not always enough. Learn to use pivot points along with other technical analysis tools such as candlestick patterns, MACD crossover, moving averages crossovers, the stochastic, RSI, etc.

The greater the confirmation, the greater your probability of a successful trade!

## Know the 3 Other Types of Pivot Points

The standard method of calculating pivot points is NOT the only way to calculate pivot points.

Traders have worked on improving the original pivot point and now there are other ways to calculate for pivot points.

In this lesson, we will talk about these other methods, as well as give you the formulas on how to calculate for these levels.

## Woodie Pivot Point

R2 = PP + High – Low

R1 = (2 X PP) – Low

PP = (H + L + 2C) / 4

S1 = (2 X PP) – High

S2 = PP – High + Low

C – Closing Price, H – High, L – Low

In the formulas above, you’ll notice that the pivot point calculation is very different from the standard method.Also, in order the calculate for the corresponding support and resistance levels, you would use the difference between the previous day’s high and low, otherwise known as the range.

Here’s a chart example of the Woodie pivot point calculation applied on EURUSD.

The Woodie pivot point, support levels, and resistance levels are the solid lines while the dotted lines represent the levels calculated through the standard method.

Because they have different formulas, levels obtained through the Woodie calculations are very different from those gotten through the standard method.Some traders prefer to use the Woodie formulas because they give more weight to the closing price of the previous period.

Others prefer the standard formulas because many traders make use of those, which could make them self-fulfilling.

In any case, since resistance turns into support (and vice versa), if you choose to use the Woodie formulas, you should keep an eye on these levels as they could become areas of interest. Whatever floats your boat!

## Camarilla Pivot Point

R4 = C + ((H-L) x 1.5000)

R3 = C + ((H-L) x 1.2500)

R2 = C + ((H-L) x 1.1666)

R1 = C + ((H-L) x 1.0833)

PP = (H + L + C) / 3

S1 = C – ((H-L) x 1.0833)

S2 = C – ((H-L) x 1.1666)

S3 = C – ((H-L) x 1.2500)

S4 = C – ((H-L) x 1.5000)

C – Closing Price, H – High, L – Low

The Camarilla formulas are similar to the Woodie formula. They also use the previous day’s close and range to calculate the support and resistance levels.The only difference is that you should calculate for 8 major levels (4 resistance and 4 support), and each of these levels should be multiplied by a multiplier.

The main concept of Camarilla pivot points is that it is based on the idea that price has a natural tendency to revert back to the mean (sound familiar?), or in this case, the previous day’s close.

The idea is that you should buy or sell when the price reaches either the third support or resistance level.

However, if the price were to burst through S4 or R4, it would mean that the intraday trend is strong, and it’s about time you jump on that bandwagon!

Check out how the Camarilla calculation gives different levels (solid lines) compared to the standard method’s levels (dotted lines)!

As you can see from the chart above, more emphasis is given to the closing price as opposed to the pivot point.

Because of this, it’s possible that resistance levels could be below the pivot point or support levels could be above it.

See how all the support and resistance levels are above the Camarilla pivot point?

## Fibonacci Pivot Point

R3 = PP + ((High – Low) x 1.000)

R2 = PP + ((High – Low) x .618)

R1 = PP + ((High – Low) x .382)

PP = (H + L + C) / 3

S1 = PP – ((High – Low) x .382)

S2 = PP – ((High – Low) x .618)

S3 = PP – ((High – Low) x 1.000)

C – Closing Price, H – High, L – Low

Fibonacci pivot point levels are determined by first calculating the pivot point like you would the standard method.Next, multiply the previous day’s range with its corresponding Fibonacci level. Most traders use the 38.2%, 61.8% and 100% retracements in their calculations.

Finally, add or subtract the figures you get to the pivot point and voila, you’ve got your Fibonacci pivot point levels!

Look at the chart below to see how the levels calculated through the Fibonacci method (solid lines) differ from those calculated through the standard method (dotted lines).

The logic behind this is that many traders like using the Fibonacci ratios. People use it for retracement levels, moving averages, etc.

Why not use it for pivot points as well?

Remember that both Fibonacci and pivot points levels are used to find support and resistance.

With so many traders looking at these levels, they can actually become self-fulfilling.

## Which pivot point method is best?

The truth is, just like all the variations of all the other indicators that you’ve learned so far, there is no single best method.

It really all depends on how you combine your knowledge of pivot points with all the other tools in your trading toolbox.

Just know that most charting software that do automatic calculations normally use the standard method in calculating the pivot point levels.

But now that you know how to calculate for these levels on your own, you can give them all a swing and see which one works best for you. Pivot away!

## How to Use Pivot Points to Measure Market Sentiment

There is one other way to incorporate pivot points into your forex trading strategy, and that’s to use it to gauge market sentiment.

What this means is that you can tell whether traders are more inclined to buy or sell the pair.

All you would need to do is to keep an eye on the pivot point. You could treat it like the 50-yard line of a football field.Depending on which side the ball (in this case, price) is on, you can tell whether buyers or sellers have the upper hand.

If the price breaks through the pivot point to the top, it’s a sign that traders are bullish on the pair and you should start buying the pair like it’s a Krispy Kreme donut.

Here’s an example of what happened when the price stayed above the pivot point.

In this example, we see that EUR/USD gapped up and opened above the pivot point.The price then rose higher and higher, breaking through all the resistance levels.

Now, if the price breaks through the pivot point to the bottom, then you should start selling the currency pair like it’s Enron or Theranos stock.

The price being below the pivot point would signal bearish sentiment and that sellers could have the upper hand for the trading session.

Let’s take a look at a chart of GBP/USD.

In the chart above, we see that the price tested the pivot point, which held as a resistance level. Next thing you know, the pair keeps going lower and lower.If you had taken the clue that price remained below the pivot point and sold the pair, you would have made some nice moolah. GBP/USD dropped almost 300 pips!

Of course, it doesn’t always work out like this.

There are times when you think that forex traders are bearish on a pair, only to see that the pair reverses and breaks through to the top!

In this example, if you saw price breaking lower from the pivot point and sold, you would have had a sad, sad day.

Later on, during the European session, EUR/USD popped higher, eventually breaking through the pivot point. What’s more, the pair stayed above the pivot point, showing how buyers were rockin’ away.

The lesson here?

Traders are fickle!How forex traders feel about a currency can shift dramatically day to day, even session to session.

This is why you cannot simply buy when the price is above the pivot point or sell when it is below it.

Instead, if you choose to use pivot point analysis in this way, you should combine it with other indicators to help you determine overall market sentiment.

## How to use Pivot Points to Trade Breakouts

Just like your normal support and resistance levels, pivot point levels won’t hold forever.

Using pivot points for range trading will work, but not all the time. In those times that these levels fail to hold, you should have some tools ready in your forex toolbox to take advantage of the situation!As we showed you earlier, there are two main ways to trade breakouts: the aggressive way or the safe way.

Either method will work just fine. Just always remember that if you take the safe way, which means waiting for a retest of support or resistance, you may miss out on the initial move.

## Using Pivot Points to Trade Potential Breakouts

Let’s take a look at a chart to see potential breakout trades using pivot points. Below is a 15-minute chart of EUR/USD.

Here we see EUR/USD made a strong rally throughout the day.We see that EUR/USD opened by gapping up above the pivot point. Price made a strong move up, before pausing slightly at R1.

Eventually, resistance broke and the pair jumped up by 50 pips!

If you had taken the aggressive method, you would have caught the initial move and been celebrating like you just won the World Cup.

On the other hand, if you had taken the safe way and waited for a retest, you would have been one sad little trader. The price did not retest after breaking R1. In fact, the same thing happened for both R1 and R2!

Notice how EUR/USD bulls tried to make a run for R3 as well.

However, if you had taken the aggressive method, you would have gotten caught up in a fakeout as the price failed to sustain the initial break. If your stop was too tight, then you would have gotten stopped out.

Later on though, you’ll see that the price eventually broke through. Notice how there was also a retest of the broken resistance line.

Also, observe how when the pair reversed later in the day and broke down past R3. There was an opportunity to take a short on the retest of resistance-turned-support-turned resistance (read that again if you have to!).

### “Role Reversal”

Remember that, when support levels break, they usually turn into resistance levels.

This concept of “role reversal” also applies to broken resistance levels which become support levels. These would have been good opportunities to take the “I think I’ll play it safe” method.

## Where do you place stops and pick targets with breakouts?

One of the difficult things about taking breakout trades is picking a spot to place your stop.

Unlike range trading where you are looking for breaks of pivot point support and resistance levels, you are looking for strong fast moves.

Once a level breaks, in theory, that level will likely become “support-turned-resistance” or “resistance-turned-support.” Again, this is called a role reversal…since the roles have been reversed.

If you were going long and price broke R1, you could place your stop just below R1.

Let’s go back to that EUR/USD chart to see where you could place your stops.

As for setting targets, you would typically aim for the next pivot point support or resistance level as your take profit point.

It’s very rare that price will break past all the pivot point levels unless a big economic event or surprise news comes out.

Let’s go back to that EUR/USD chart to see where you would put those stops and take profit.

In this example, once you saw price break R1, you would have set your stop just below R1.If you believed that price would continue to rise, you could keep your position and move your stop manually to see if the move would continue.

As with any method or indicator, you have to be aware of the risks with taking breakout trades.

First of all, you have no idea whether or not the move will continue. You might enter thinking that price will continue to rise, but instead, you catch a top or bottom, which means that you’ve been faked out!

Second, you won’t be sure if it’s a true breakout or just wild moves caused by the release of important news.

Spikes in volatility are a common occurrence during news events, so be sure to keep up with breaking news and be aware of what’s on the economic calendar for the day or week.Lastly, just like in range trading, it would be best to pop on other key support and resistance levels.

You might be thinking that R1 is breaking, but you failed to notice a strong resistance level just past R1.

Price may break past R1, test the resistance and just fall back down.

You should make use of your forex knowledge of support and resistance, candlestick patterns, and momentum indicators to help you give stronger signals as to whether the break is for real or not.

## How to use Pivot Points for Range Trading

The simplest way to use pivot point levels in your forex trading is to use them just like your regular support and resistance levels.

Just like good ole support and resistance, the price will test the levels repeatedly.

The more times a currency pair touches a pivot level then reverses, the stronger the level is.Actually, “pivoting” simply means reaching a support or resistance level and then reversing.

If you see that a pivot level is holding, this could give you some good trading opportunities.

• If the price is nearing the upper resistance level, you could SELL the pair and place a stop just above the resistance.
• If the price is nearing a support level, you could BUY and put your stop just below the level.

See? Just like your regular support and resistance! Nothing hard about that!Let’s take a look at an example so you can visualize this. Here’s a 15-minute chart of GBP/USD.

In the chart above, you see that price is testing the S1 support level. If you think it will hold, what you can do is buy at market and then put a stop loss order past the next support level.

If you’re conservative, you can set a wide stop just below S2. If the price reaches past S2, chances are it won’t be coming back up, as both S1 and S2 could become resistance levels.

If you’re a little more aggressive and confident that support at S1 would hold, you can set your stop just below S1.

As for your take profit points, you could target PP or R1, which could also provide some sort of resistance. Let’s see what happened if you bought at market.

And bam! It looks like S1 held as support! What’s more, if you had targeted PP as your take profit point, you would have hit your PT! Woohoo! Ice cream and pizza for you!

Of course, it ain’t always that simple. You shouldn’t rely only on the pivot point levels. You should note whether pivot point levels line up with former support and resistance levels.

You can also incorporate candlestick analysis and other types of indicators to help give you more confirmation.For example, if you see that a doji has formed over S1, or that the stochastic is indicating oversold conditions, then the odds are higher than S1 will hold as support.

Also, most of the time, trading normally takes place between the first support and resistance levels.

Occasionally, the price will test the second levels and every once in a while, the third levels will be tested.

Lastly, you should also fully understand that sometimes, price will just break through all the levels like how Rafael Nadal breezes through the competition on clay courts.

What will you do when that happens?

Continue to hold onto your trade and be a sucker and watch your account dwindle away? Or will you take advantage and get back some pips?

In the next lesson, we’ll teach you how to take advantage of when these levels break down.

## How to Calculate Pivot Points

The first thing you’re going to learn is how to calculate pivot point levels.

The pivot point and associated support and resistance levels are calculated by using the last trading session’s open, high, low, and close.Since forex is a 24-hour market, most forex traders use the New York closing time of 5:00pm EST as the previous day’s close.

## Pivot Point Calculation

The calculation for a pivot point is shown below:

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

Support and resistance levels are then calculated off the pivot point like so:

First level support and resistance:

First resistance (R1) = (2 x PP) – Low

First support (S1) = (2 x PP) – High

Second level of support and resistance:

Second resistance (R2) = PP + (High – Low)

Second support (S2) = PP – (High – Low)

Third level of support and resistance:

Third resistance (R3) = High + 2(PP – Low)

Third support (S3) = Low – 2(High – PP)

Keep in mind that some forex charting software plot intermediate levels or mid-point levels.These are basically mini levels between the main pivot point and support and resistance levels.

If you hated algebra, have no fear because you don’t have to perform these calculations yourself.Most charting software will automatically do this for you. Just make sure you configure your settings so that it uses the correct closing time and price.

We here at BabyPips.com also have our very own Pivot Point Calculator!

The forex pivot point calculator can come in handy, especially if you want to do a little backtesting to see how pivot point levels have held up in the past.

Remember, one of the advantages of using pivot points is that it is objective, so it’s very easy to test how price reacted to them.

Next up, we’ll teach you the various ways in which you can incorporate pivot points into your forex trading strategy.

## Forex Pivot Points

Professional forex 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, forex 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, forex 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, forex 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 forex 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?!

## Pivot Point Lingo

Here’s a 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 forex pivot points, the different types of pivot points, and most importantly, how you can add pivot points to your forex trading toolbox!

## Chart Patterns Cheat Sheet

Like we promised, here’s a neat little cheat sheet to help you remember all those chart patterns and what they are signaling.

We’ve listed the basic forex chart patterns, when they are formed, what type of signal they give, and what the next likely price move may be. Check it out!

You never know when you’re gonna need to cheat, hah! Bookmark this thing yo!

And as you probably noticed, we didn’t include the triangle formations (symmetrical, ascending, and descending) in this cheat sheet.That’s because these chart patterns can form either in an uptrend or downtrend, and can signal either a continuation or reversal.

Confusing I know, but that’s where practice and experience come in!

As we mentioned, it’s tough to tell where the forex market will breakout or reverse.

So what’s important is that you prepare well and have your entry/exit orders ready so that you can be part of the action either way!

## Know the 3 Main Groups of Chart Patterns

That’s a whole lot of chart patterns we just taught you right there. We’re pretty tired so it’s time for us to take off and leave it to you from here…

Just playin’! We ain’t leaving you till you’re ready!In this section, we’ll discuss a bit more about how to use these chart patterns to your advantage.

It’s not enough to just know how the tools work, we’ve got to learn how to use them. And with all these new weapons in your arsenal, we’d better get those profits fired up!

Let’s summarize the chart patterns we just learned and categorize them according to the signals they give.

## Reversal Chart Patterns

Reversal patterns are those chart formations that signal that the ongoing trend is about to change course.If a reversal chart pattern forms during an uptrend, it hints that the trend will reverse and that the price will head down soon.

Conversely, if a reversal chart pattern is seen during a downtrend, it suggests that the price will move up later on.

In this lesson, we covered six chart patterns that give reversal signals. Can you name all six of them?

1. Double Top
2. Double Bottom
5. Rising Wedge
6. Falling Wedge

If you got all six right, brownie points for you!

To trade these chart patterns, simply place an order beyond the neckline and in the direction of the new trend. Then go for a target that’s almost the same as the height of the formation.

For instance, if you see a double bottom, place a long order at the top of the formation’s neckline and go for a target that’s just as high as the distance from the bottoms to the neckline.

In the interest of proper risk management, don’t forget to place your stops! A reasonable stop loss can be set around the middle of the chart formation.

For example, you can measure the distance of the double bottoms from the neckline, divide that by two, and use that as the size of your stop.

## Continuation Chart Patterns

Continuation chart patterns are those chart formations that signal that the ongoing trend will resume.

Usually, these are also known as consolidation patterns because they show how buyers or sellers take a quick break before moving further in the same direction as the prior trend.

Trends don’t usually move in a straight line higher or lower. They pause and move sideways, “correct” lower or higher, and then regain momentum to continue the overall trend.

We’ve covered several continuation chart patterns, namely the wedges, rectangles, and pennants. Note that wedges can be considered either reversal or continuation patterns depending on the trend on which they form.

To trade these patterns, simply place an order above or below the formation (following the direction of the ongoing trend, of course).Then go for a target that’s at least the size of the chart pattern for wedges and rectangles.

For pennants, you can aim higher and target the height of the pennant’s mast.

For continuation patterns, stops are usually placed above or below the actual chart formation.

For example, when trading a bearish rectangle, place your stop a few pips above the top or resistance of the rectangle.

## Bilateral Chart Patterns

Bilateral chart patterns are a bit more tricky because these signal that the price can move EITHER way.

Huh? What kind of a signal is that?!

A bilateral signal.

This is where triangle formations fall in. Remember when we discussed that the price could break either to the topside or downside with triangles?

To play these chart patterns, you should consider both scenarios (upside or downside breakout) and place one order on top of the formation and another at the bottom of the formation.If one order gets triggered, you can cancel the other one. Either way, you’d be part of the action.

Double the possibilities, double the fun!

The only problem is that you could catch a false break if you set your entry orders too close to the top or bottom of the formation.

So be careful and don’t forget to place your stops too!

## How to Trade Triangle Chart Patterns

triangle chart pattern involves price moving into a tighter and tighter range as time goes by and provides a visual display of a battle between bulls and bears.

The triangle pattern is generally categorized as a “continuation pattern”, meaning that after the pattern completes,  it’s assumed that price will continue in the trend direction it was moving before the pattern appeared.

A triangle pattern is generally considered to be forming when it includes at least five touches of support and resistance.

For example, three touches of the support line and two for the resistance line. Or vice versa.

Just like there are three little pigs, there are three types of triangle chart formations: symmetrical triangle, ascending triangle, and descending triangle.

## Symmetrical Triangle

symmetrical triangle is a chart formation where the slope of the price’s highs and the slope of the price’s lows converge together to a point where it looks like a triangle.What’s happening during this formation is that the market is making lower highs and higher lows.

This means that neither the buyers nor the sellers are pushing the price far enough to make a clear trend.

If this were a battle between the buyers and sellers, then this would be a draw.

This is also a type of consolidation.

In the chart above, we can see that neither the buyers nor the sellers could push the price in their direction. When this happens we get lower highs and higher lows.As these two slopes get closer to each other, it means that a breakout is getting near.

We don’t know what direction the breakout will be, but we do know that the market will most likely break out. Eventually, one side of the market will give in.

So how can we take advantage of this?

Simple.

We can place entry orders above the slope of the lower highs and below the slope of the higher lows of the symmetrical triangle.

Since we already know that the price is going to break out, we can just hitch a ride in whatever direction the market moves.

In this example, if we placed an entry order above the slope of the lower highs, we would’ve been taken along for a nice ride up.

If you had placed another entry order below the slope of the higher lows, then you would cancel it as soon as the first order was hit.

## Ascending Triangle

An ascending triangle is a type of triangle chart pattern that occurs when there is a resistance level and a slope of higher lows.

What happens during this time is that there is a certain level that the buyers cannot seem to exceed. However, they are gradually starting to push the price up as evidenced by the higher lows.

In the chart above, you can see that the buyers are starting to gain strength because they are making higher lows.

They keep putting pressure on that resistance level and as a result, a breakout is bound to happen.Now the question is, “Which direction will it go? Will the buyers be able to break that level or will the resistance be too strong?”

Many charting books will tell you that in most cases, the buyers will win this battle and the price will break out past the resistance.

However, it has been our experience that this is not always the case.

Sometimes the resistance level is too strong, and there is simply not enough buying power to push it through.

Most of the time, the price will, in fact, go up. The point we are trying to make is that you should not be obsessed with which direction the price goes, but you should be ready for movement in EITHER direction.

In this case, we would set an entry order above the resistance line and below the slope of the higher lows.

In this scenario, the buyers lost the battle and the price proceeded to dive! You can see that the drop was approximately the same distance as the height of the triangle formation.

If we set our short order below the bottom of the triangle, we could’ve caught some pips off that dive.

## Descending Triangle

As you probably guessed, descending triangles are the exact opposite of ascending triangles (we knew you were smart!).

In descending triangle chart patterns, there is a string of lower highs which forms the upper line. The lower line is a support level in which the price cannot seem to break.

In the chart above, you can see that the price is gradually making lower highs which tell us that the sellers are starting to gain some ground against the buyers.Now most of the time, and we do say MOST, the price will eventually break the support line and continue to fall.

However, in some cases, the support line will be too strong, and the price will bounce off of it and make a strong move up.

The good news is that we don’t care where the price goes. We just know that it’s about to go somewhere.

In this case, we would place entry orders above the upper line (the lower highs) and below the support line.

In this case, the price ended up breaking above the top of the triangle pattern.

After the upside breakout, it proceeded to surge higher, by around the same vertical distance as the height of the triangle.

Placing an entry order above the top of the triangle and going for a target as high as the height of the formation would’ve yielded nice profits.