Trading with the pivot point indicator
The pivot point indicator as the name suggests is an indicator designed for the MT4 trading platform. The indicator automatically plots the pivot points in real time.
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In the early days of trading, pivot points were used mostly be floor traders. These were traders who would trade in the trading pits and had to manually calculate the pivot levels for the day ahead.
Now a days, with electronic trading platforms and advanced charting tools, the pivot point indicator does all the hard work for you.
You only have to install the pivot point indicator and drag it onto your charts and let the indicator do all the work for you.
Trading with pivot points has come a long way since the days of floor traders. It is widely used not just in the forex markets but also in the commodity markets as well as stocks. Pivot point trading is ideally suited for intraday traders.
The most common pivot points are based off the previous day’s range. However, traders have extended this to showcase pivot points for the week and for the month. The general rule of thumb is that the pivot points from higher time frames are stronger compared to the daily pivot points.
Pivot point trading is relatively easy to work with. It can be combined into any existing trading system or you can develop a completely new trading system based off pivot points.
In this article, we take a look at the pivot point indicator for MT4 and how you can use this in your day trading. But before we go into the details here’s a refresher on how pivot points work and how you can use pivot points in day trading.
How do pivot points work?
Pivot points are mathematically calculated values based on the price action from the previous day. The pivot points plot three levels of support and resistance during the daily session.
Therefore, during any trading session you will come across three resistance levels and three support levels. The mid-point between these forms the pivot point for the day.
Price is expected to reverse at one of the pivot points plotted on the chart. Sometimes, when there is extreme volatility, you can expect price to break past the pivot points. Therefore, some traders prefer to use five or more pivot points.
Think of pivot points as the potential support and resistance levels for the day.
It is more widely used in intraday trading rather than swing trading.
As mentioned earlier, the pivot point indicator plots the pivot points based on the previous day’s price action. There are three important variables to plotting the pivot points. These are the high, low and close of the price during the previous day.
The pivot points start with the pivot point itself. This is the mid-point in the market. The mid-point is calculated as the average of the three price levels from the previous day.
Once the main pivot point or the mid-point is calculated, the calculation for the support and resistance levels are easy.
Resistance 1 is calculated by multiplying the pivot point by two and subtracting it from the previous day’s low.
Support 1 is calculated by multiplying the pivot point by two and subtracting it from the previous day’s high.
The resistance 2 is calculated as a sum of the current day’s pivot point and the difference between yesterday’s high and low.
The support 3 is calculated as the difference between the current day’s pivot point and the difference between yesterday’s high and low.
To summarize, the pivot point calculation is based as follows:
Resistance 2 = Pivot point + (High - Low)
Resistance 1 = (Pivot point x 2) – Low
Pivot point = (High + Low + Close)/3
Support 1 = (Pivot point x 2) – High
Support 2 = Pivot point – (High – Low)
Note that in the above formula, when we mention high, low and close, it refers to the previous day’s values. The key to identifying the support and resistance levels depends on first calculating the day’s pivot point.
How to use the pivot points in day trading?
Pivot points act as potential support and resistance levels. Therefore, when price is nearing a resistance or a support level, there is a high likelihood that it could reverse. The higher or lower the price advances or falls, the greater the chances that it will near the extreme outer resistance and support levels.
It should be noted that the pivot points only indicate potential support and resistance levels. They are not a guarantee that price will reverse at one of the levels. Sometimes, when the trends are strong, you can expect price to break past all the pivot points.
This brings to mind the fact that traders should not use pivot points in isolation. You should use the pivot points alongside your trading strategy. Pivot points can be a useful tool in a way as they can predict the potential price areas of reversals.
Pivot points are also an easy way to trade for those who struggle with support and resistance analysis. Understanding the market context and plotting the support and resistance levels takes time and practice.
the pivot points are a good starting point for traders to have these levels being drawn automatically using the pivot point indicator the MT4 trading platform.
You can use the pivot points in day trading by combining methods such as divergence which can signal a reversal. When there is a confluence of divergence and one of the pivot points, you can trade in that direction.
Likewise, you can enhance your pivot point trading by utilizing other methods such as analyzing the candlestick patterns when price is at one of these levels.
You should also gauge the market momentum and the context when trading with pivot points. During strong trends, price can invalidate all the pivot points.
One thing to bear in mind is that the pivot points tend to change on a daily basis. Sometimes when you see that the price action has been confined to a small range, the next day’s pivot levels can be small in nature as well. They are situated very close to each other.
On other days, when you see high volatility in the security, you can expect the next day’s pivot levels to be spread wider apart.
Regardless of how far or wide the pivot levels are plotted, the mid-point or the main pivot point always acts as a magnet for price. Price tends to oscillate around the mid-point or the main pivot point.
Traders usually take positions when price nears one of the resistance or support levels.
Pivot point indicator for MT4
The pivot point indicator for the MT4 platform is easy to use. Install the indicator into your indicator folder and then refresh the navigation pane under indicators for your MT4 trading terminal to pick up the indicator.
Once the indicator is installed, you can then configure the indicator based on your preference.
Pivot point indicator MT4 configuration
As you can see, the configuration window has a lot of information using which you can highly customize the pivot point indicator.
To begin with, you can select the main time frame from which you want the pivot points to be calculated. The standard setting is 1 day. But you can change this to 1 week or 1 month as well.
An unconventional setting, you can also use pivot points based off the H1 and even H4 values. But it is best to avoid these settings if you are just getting started with pivot point trading or with forex trading in general.
You can choose the option for the pivot point indicator to make use of Fibonacci levels or to use the classic calculation for the pivot points. The remainder of the configuration is mostly cosmetic, so you can make the indicator to be highly customized visually.
It should be noted that you also have the option to plot the zones. The zones allow you to select the potential area of supply and demand. When price is trading in one of these zones, there is a high chance of a reversal.
The next chart below shows the pivot point indicator based on the daily session’s price variables and applied to the one-hour chart time frame.
Classic pivot points on H1 chart
In the above illustration you can see that the pivot point indicator gives you a complete picture, including the day’s session and also the various levels on the chart. You can see how price behaves near these levels.
The next chart below shows the pivot point indicator based off the weekly time frame. In this case, we make use of the H4 chart. However, you can use the weekly pivot points and trade based off the one hour chart time frame.
Weekly pivot points and H4 chart
One of the unique things about the pivot point indicator is that you can also configure the indicator to show future pivot points. But bear in mind that the future pivot points continuously adjust to the current day’s price action.
Once the daily session or the current weekly session is closed, the next future pivot levels will be established.
In the above chart, you can see how price hit the resistance level and after multiple attempts, price action eventually capitulated and fell sharply towards the mid-point or the main pivot point for the week.
The pivot point indicator can be used to day trade the markets. It can be applied to both currencies or stock CFD’s or even commodity CFD’s such as gold and silver.
One of the drawbacks of this indicator is that it does not plot past or previous pivot points. This can make pivot point analysis somewhat difficult as you do not have anything to compare the current day’s pivot point levels to the previous day’s levels.
Still, this shouldn’t be much of a drawback if you use the pivot points mostly as reference points in your technical analysis.
The green and red zones shown on the pivot points are basically called the buy and sell zones. There is a high chance that price could break past these levels. Therefore, it is not advisable to blindly place buy and sell orders at these levels.
Pivot point indicator – Conclusion
In conclusion, the pivot point indicator for MT4 is a simple handy tool for day traders.
You can use the pivot point indicator to day trade the markets with ease by combining it with one of the methods mentioned in this article.
There are many different types of pivot points that have evolved over a period of time. The pivot point indicator shown in this article is based off the classic pivot points. Traders have customized this classic pivot point indicator into other types as well.
Some of the other versions of the pivot point indicators include:
- Fibonacci based pivot points
- Woodies pivot points
- Camarilla pivot points
All these different types of pivot points basically work off the core concept which is using yesterday’s price variables to derive the current day’s potential support and resistance levels. Traders often make the mistake of trying to figure out which of these methods is better.
The bottom line is that it is up to you to experiment. There is no big edge that you can gain when you switch from the classic pivot points to any of the custom pivot points mentioned above.
Regardless of the calculation, the pivot point indicator is nothing a potential support and resistance levels that are plotted for the day. Traders need to understand the reasons behind the pivot points that are plotted in order to trade with success.
If you simply switch from one pivot point indicator to another, it is highly unlikely that you will gain any market edge.
The pivot point indicator for MT4 platform presented here is a fairly decent indicator and is ideal to help traders to get started with pivot points and also understand the concept of trading with support and resistance levels.