Pivot Points are one of the most effective tools for support and resistance among all technical indicators you have learned about. It is advised to use it as a setting point for your Stop Loss and Take Profit orders. Pivot Points calculate the average of the Low, High, Opening and Closing prices of each of the last candlesticks.
Pivot Points work better in the short-term (Intraday and Scalping trades). It is considered to be a very objective tool, similar to Fibonacci, helping us avoid subjective interpretations.
Tip: It is a great tool for traders who wish to enjoy small changes and limited profits in the short-term.
So, how does this tool work? By drawing vertical supports and resistances line:
PP = Pivot point ; S = Support ; R = Resistance
Say the price is situated within the support area, we would go long (buy), not forgetting to set a Stop Loss beneath the support level! And vice versa – if the price comes near the resistance area, we would go short (sell)!
Let’s take a look at the chart above: Aggressive traders would set their Stop Loss Order above S1. More conservative traders would set it above S2. The conservative traders will set their Take Profit Order at R1. The more aggressive ones will set it at R2.
Pivot point is a trade zone of balance. It acts as an observation point for other forces operating in the market. When breaking up, the market goes bullish, and when breaking down, the market goes bearish.
The pivot frame is S1/R1 is more common than S2/R2. S3/R3 represents extreme conditions.
Important: As is the case with most indicators, Pivot Points work well with other indicators (raising chances).
Important: Don’t forget – when supports break, they turn into resistances on many occasions, and vice versa.
We have introduced you to two groups of technical indicators:
- Momentum Indicators: Alert us traders after a trend starts. You can relate to them as informers – letting us know when a trend arrives. Examples of momentum indicators are Moving Averages and MACD.
Pros – They are safer to trade with. They score higher results if you learn to use them right.
Cons – They sometimes “miss the boat”, showing too late, missing major changes.
- Oscillators: Alert us traders just before a trend starts, or changes direction. You can relate to them as prophets. Examples of oscillators are Stochastic, SAR and RSI.
Pros – When hitting the target they provide us with large earnings. Through very early identification, traders enjoy the full trend
Cons -Prophets are sometimes false prophets. They can cause cases of mistaken identity. They are suitable for risk lovers.
Tip: We strongly recommend getting used to working simultaneously with indicators from both groups. Working with one indicator from each group is very effective. This method restrains us when needed, and it pushes us to take calculated risks on other occasions.
Also, we love working with Fibonacci, Moving Averages and Bollinger Bands. We find the three of them very effective!
Remember: Some indicators we relate to as Support / Resistance levels. Try to remember which ones we are talking about. For instance – Fibonacci and Pivot Points. They are extremely helpful when trying to spot breakouts in order to set entry and exit points.
Let us remind you of the indicators that you found in your tool box:
- Please welcome… The Fibonacci Indicator!
- Second to come on the stage… Moving Average!
- Next in line is… RSI!
- Clap your hands for… Stochastic!
- Who’s next?… Bollinger Bands!
- Let us welcome… ADX Trading Strategy!
- Give your applause to… MACD!
- Before ending… Parabolic SAR
- Last but not least… Pivot Points!
We remind you not to use too many indicators. You should feel good working with 2 or 3 indicators.
Tip: You have already tried and practiced your demo accounts so far. If you wish to open real accounts as well (wish to attempt to get some real deal experience), we recommend opening relatively low budget accounts. Remember, the higher the gain potential, the higher the risk of losing. Anyway, we believe that you should not deposit real money before practicing a bit more and doing the next exercise.
$400 to $1,000 is considered as relatively modest amounts for opening an account. This range can still produce very nice profits for traders, although it is recommended to be extra cautious when trading with these amounts. For those who are extremely eager to open an account no matter what, some brokers allow you to open an account with lower capital, even down to 50 dollars or Euros (Though we do not recommend opening such a small account at all! Chances for nice profits are small, and risks remain the same).
Tip: If you have come to the conclusion that technical analysis is the best way to trade for you, and you are ready to find a good broker and open account, we can recommend on great brokers. Their trading platforms, toolbox and user’s comfort are the best in the industry, along with strong performance and reliability, in our opinion. Click here to visit our recommended brokers.
Go to your demo account. Let’s practice the subjects that you have learned in this chapter:
- The best advice that we can give you is simply to experience all the indicators that you have learned in the last lesson on your platforms. Remember, demo accounts operate in real time and on real charts from the market. The only difference is that you don’t trade real money on demos! Therefore, it is a fantastic opportunity to practice the technical indicators and trade on virtual money. Work at first with each indicator separately, than, begin trading with two or three indicators simultaneously.