Last week I spoke to you about the power of historical support and resistance levels to give us advance insight into the way prices can behave over the coming days, weeks and months.
Today I’d like to look at some short-term levels that you can use as a guide in day trading.
What’s more – you can download this tool for FREE from the Trader’s Bulletin website.
What I’m talking about are five horizontal lines that you can draw on your chart every morning that give you some serious clues about which way the market will go … where it might bounce back or hesitate … and where you can expect a breakout to move to …
It only takes a few moments each morning to calculate these levels and mark them up on your chart. I think you’ll find that it’s time well spent.
What the markets hinge on
The lines I’m talking about here are pivot points. And once you get used to seeing them on your chart each morning – you’ll feel lost without them.
For many years, traders have used these support and resistance levels, and you’ll find that they really come into their own when you’re looking for entry and exit levels for your trades.
The key pivot points are 5 levels: central pivot point; resistance 1; resistance 2; support 1; support 2.
Plotted on a chart, they’ll look something like this:
This chart is a day that I chose at random from the FTSE last month. The green line is the central pivot point – this is our most important level. Above it are two levels of resistance: R1 & R2. Below it are two levels of support: S1 & S2.
Each of these lines can offer a degree of support and resistance to the price. Of course, as with all trading signals, it’s not an exact science.
This week I’d like to show you exactly how to calculate these levels and put them up on your chart – and next week, I’ll show the strategies you can apply to them.
Don’t want to do the maths?
The calculation for pivot points is dead simple, and I’ve laid it out below. However, I really don’t see any reason for getting the calculator out, when someone else (namely me!) is prepared to do the work for you.
That’s why I’m offering my own pivot point calculator (it’s just a very basic Excel spreadsheet) as a free download to all Trader’s Bulletin members.
All you need to do is check the high, low and close prices on the daily chart for the previous day’s trading, and input those into the calculator.
The calculator will give you your five key pivot point levels. Switch to a smaller timeframe that you work on for day trading (say a 5 or 10 minute chart), and add these five levels to your chart.
You’ll also see on the calculator some more advanced levels – R3 & S3, plus mid-levels of M1, M2, M3 and M4 (we’ll get on to those next week).
(Some charting packages will calculate and draw your pivot lines for you, which can save you even more time.)
And if you prefer to do it long-hand, here are the calculations (H = previous day’s high; L = previous day’s low; C = previous day’s closing price):
P = (H + L + C) / 3
R2 = P + (H-L)
R1 = (P x 2) – L
S1 = (P x 2) – H
S2 = P – (H – L)
Using pivot points in forex trading
Pivot points can be applied across all instruments, including forex. However, because forex markets are 24-hour, you need to give a little thought to what reference you’re going to use for highs, lows and closing prices for the trading “day”.
Some traders will use pivot points based on Eastern Standard Time, others will use points based on GMT. Both are valid, and my advice would be to work with the session that you trade – i.e. if you’re trading the London session, use GMT. If you’re unsure what times your broker’s prices work to, it’s worth dropping them a line to double-check.
How to use pivot points to make profits
Pivot points are powerful tools for identifying entry and exit levels, and for spotting the key levels that need to be broken for a move to qualify as a breakout.
Next week, I’ll show you some quick and simple strategies that you can use to apply these tools to your trading.