Remember when we talked about horizontal support and resistance, I told you it is more like a zone, not an exact line and that different traders can see different levels of support or resistance. The same is true for diagonal support and resistance. Well, now I will introduce you to a new way of determining S/R levels – one that uses objective mathematical calculation, using the High, Low and Close of the previous day. I won’t go into explaining the formula for calculating Pivot Points, because you will find indicators that plot the levels on the charts.
Once you have plotted the Pivot Points on the chart, you will see one main Pivot Point, several support levels (how many, depends on the indicator you use) and several resistance levels.
Daily Pivot Points
A lot of traders use Daily Pivot Points to find key levels of support and resistance and the reason they work is because everybody sees the same thing, there is no subjectivity involved. Don’t take my word for it, place the Pivot Points on your charts and see how price reacts to them.
If all the traders see the same levels, those levels become stronger. Price will react at those levels more often than not, giving you good trading opportunities. If you are in a trade that shows a floating profit but price is approaching the Daily Pivot Point, it would be wise to lock in some of that profit, as you will never know for sure how price will react to the Pivot – it could reverse, wiping out a part or all the profits.
The easiest way to use Pivot Points is just like the normal S/R levels. Price will test them several times before finally breaking through. Keep in mind that, like everything in Forex, Pivot Points can fail, meaning that price will not bounce when touching them.
Range traders will buy at a support level and sell at a resistance level, making the Pivot points a very useful tool. Trend traders will watch Pivot Point levels, trying to predict where a retracement will end or for stop loss placement.
If a horizontal S/R level is the same as a Pivot level that will give it more strength and you can be almost sure that price will react there. This is called Confluence, but we will speak about it some other time.