Pivot Levels – Trader’s Guiding Star
We study the features of building and trading at Pivot levels
Along with the ability to identify the prevailing market trend, a novice trader needs to have one or more methods for determining resistance and support levels in his arsenal. If the search was successful, and the approach used works, you can begin to build trading strategies and systems. If not, research should continue. In technical analysis, there are many ways to identify important levels, including diagonal lines and channels, Fibonacci numbers and ratios, moving averages, market profile, and others. Today we’ll talk about Pivot levels.
In fundamental analysis, there is such a thing as a “self-fulfilling forecast”. If the market believes that the inversion of the yield curve will lead to a recession, companies begin to curtail investments, and consumers start their activity. As a result, the economy is really slowing down. The same can be said about some technical analysis tools: if many traders use Fibonacci ratios and Pivot levels in their practice, then they automatically start working. It is believed that the first tool is more subjective since for its use it is first necessary to determine the extremes. The second, on the contrary, is objective, since mathematical formulas are used:
Pivot Points = (High + Low + Close) / 3
Resistance R1 = (2 x PP) – Low
Support S1 = (2 x PP) – High
Resistance R2 = PP + (High – Low)
Support S2 = PP – (High – Low)
Resistance R3 = High + 2 (PP – Low)
Support S3 = Low – 2 (High – PP)
Then these levels are plotted, which allows you to break it into zones and track the reaction of quotes to tests of identified resistance or support.
Pivot levels on the GBP / USD chart
Pivot levels allow you to trade both breakouts and rebounds. If the price of an asset falls from PP to S1, and then rises, we can talk about the first sign of weakness of the “bears” – they cannot push the quotes of the currency pair below important support. The best option is the formation of a reversal pattern at one of the levels, as happened with the British pound in early September. On his daily chart, a pin bar was formed near the US dollar near S1. As a result, a buy signal arose. Long was opened the next day, a protective stop order was placed below the minimum of the pin bar, take profit at levels R3 and R4.
Strategy based on Pivot levels on the GBP / USD chart
As I noted at the very beginning, it is desirable that the trader’s arsenal should have not one, but several techniques for identifying resistances and supports. If the levels identified with their help coincide or are close to each other, and quotes begin to fluctuate near the control zones, even a beginner can begin to prepare the next deal. So, in the case of sterling, plotting the Fibonacci levels and consolidating the GBP / USD pair near the zones of their combination with the Pivot levels indicate that everything was done correctly.
Pivot and Fibonacci levels on the GBP / USD chart
A combination of Pivot levels with such a technical analysis tool as a downward or upward trading channel seems quite effective. A break of the upper border of the first of them on the daily GBP / USD chart near 1.26 will strengthen the risks of continuing the pound rally against the US dollar.
Pivot and trading channel levels on the daily GBP / USD chart
Thus, the Pivot levels are a powerful help in identifying resistances and supports, and their combination with other technical analysis tools allows you to develop effective trading strategies.