Today I’m going to show you exactly what pivot points are, and how they can be used in trading Forex, stocks, and crypto. I’m going to show you the strategy that, when you add to the use of pivot points, would make the results much better than they would be without the secret that I’m about to show. So let’s get started with that right now.
When I first got started in trading, I was taking one of the most popular courses on Forex trading at the time, and I was learning from a well-known, popular, seasoned mentor. And I found out that something called “pivot points” was considered a significant part of any trading strategy by a lot of professional traders, which I’m going to show you more about in just a minute.
Many people have made the mistake of thinking that pivot points are a trading strategy but all they do is give you some areas of price that can be used to determine the direction the market is going for that day, and whether there might be a turn.
Apparently this whole concept was born out of the “trading floor” world. This type of trading world was common in old-school major trading exchanges, especially in the U.S., such as the New York Stock Exchange (NYSE), the Chicago Board of Trade, and also in the Nasdaq and the S&P 500 pit trading, which I think was one of the last of the ones to become completely obsolete. In this kind of old-school environment, where stress is enhanced rather than trading and making decisions with calm relaxation and making wise decisions about whether you should enter or exit a trade.
Floor traders would all trade in a heightened sense of emotional stress, constantly shouting out and yelling and waving their arms around, using hand signals to get their trades entered. What they were actually doing was on the verge of converting trading financial markets into being some kind of a mob fight or riot. To understand how pivot points became popular and how they are used, we can imagine this scenario. The concept of “professional trading” does not necessarily mean what a lot of us would think that it means.
As former Goldman Sachs trader, Anton Kreil confesses, trading for Goldman Sachs means that he picked up the phone and answered the phone. When a customer called in, he could try to sell them some investments product. Then he put their investments into the market for them by entering an investment on the behalf of the customer. That’s what professional trading is with Goldman Sachs and other professional companies.
The “trader” (customer service representative or investment sales representative) just takes the orders from the customer and puts them in the market. There’s no trading involved. There’s no analysis or anything and the trade trader doesn’t know whether the investment will be good or bad, and really doesn’t necessarily care because they’re going to get commission either way.
Now there are companies that hire “professional traders” to go out into the trading pits and buy some soybeans or buy some pork bellies. They may be given a general objective for what they’re supposed to do, but they’re supposed to go out there onto the trading floor and buy or sell commodities.
If we think that those traders know how to analyze the market and read whether the market is going up or down, whether it’s going to turn, or what is happening with trends and corrections, you might be surprised at how they don’t likely know anything about that. Only a few of those traders have the kind of knowledge and skill to even get profit consistently, because that’s not really what their objective is. And if any of those traders do get consistent profit it’s likely more from some kind of a trading pit market behavior setting and not from chart reading skills. Even though they are so called “professionals” this type of trading has almost become completely obsolete and most of these major exchanges have shut down their trading pits because now almost everything is done digitally on computers. There’s just no need for people to go into these pits and offer some commodity and have people yelling to buy them because that’s just not the way things are done these days. Any type of a trading floor now is some kind of a localized office where traders are working at desks with computers instead of shouting out entry orders.
So if you’re like me, you may have only seen this in movies like Trading Places with Dan Aykroyd and Eddie Murphy. Or What Happens in Vegas with Cameron Diaz. Now I’ve discovered that fairly recently, this whole thing has just died out and became something of the past.
The “Secret” Pivot Point Trading Floor Method
But it was in this world of trading floors where professional traders begin to carry the daily pivots in their pockets written down on a piece of paper. They carry these things in their pockets and then this would give them a guide as a way of having specific price levels and its most basic concept is a lot like using moving averages except that the daily average of yesterday’s high low and closing price is what is used to determine the daily pivot. So trading above that level is considered a sign of bullish sentiment, and trading below that level is considered bearish.
If the price goes to one of these known levels and appears to be turning it is considered that it might be turning. And when it turns, it might go the other direction for that day. If it goes to one of these levels and it goes through that level then it’s considered that maybe it’s going to keep going that direction for the rest of that day. The floor traders were just urgently determining intraday price and these points were used to take profit or enter when there’s confirmation of a reversal. Or enter when the price is confirmed to be moving past the point. So in that respect, they can be used with a little bit of “trading common sense” applied, knowing that there’s nothing absolute or magical about it.
There may be very little that is scientific or magical about the use of these pivots but they give people a reference and a guide and they can seem to be somewhat useful when used with other knowledge. So pivot points themselves are a simple calculation based on the average of yesterday’s high low and closing price. You know what a pivot point is? It’s a simple average of yesterday’s high low and closing price. This gives a simple reference that trading above that price is considered bullish and trading below that price is considered bearish.
Traders always search for some kind of a reference that creates some kind of a reason for having some kind of a horizontal line. Because without any horizontal lines traders feel like they have nothing to gauge anything on. They feel like they have no reason to expect a market to go up or down, or how far it should go. Because reading charts is not known to them and most traders are chart reading illiterate. So when a chart is just “wide open space,” It seems like the price can just go anywhere if there’s no horizontal lines on the chart.
Even now today, you can see that almost all traders rely on having a lot of horizontal lines to divide things up, and give a price direction reference.
“If the price gets to here that’s good.”
“Maybe it will turn.”
“Maybe it will keep going.”
I don’t use any horizontal lines myself, and I believe that they can be a distraction and irrelevant if you know how to read the chart. I’m going to show you how to overcome this sense of blindness and uncertainty, and how the use of pivot points compares to the use of standard support and resistance also called supply and demand which is often claimed to be two different things.
“Pivot points” as an indicator that you put on your charts, displays a few lines, a center pivot point, and R1 and R2, S1 and S2. (This means Resistance 1, Resistance 2, Support 1, and Support 2) It’s very simple.
Weekly and even monthly pivots are used, but the original concept was the daily pivots to trade short term intraday time frames. When used as a slight addition to the scoring of probability, that can be helpful. So take a look at the basic formula for how to determine pivots. There are a few variations of this formula which are now available and known as:
- Traditional — that’s the standard pivot formula.
- Fibonacci –
- Woody’s Pivots
- Classic which I think is the same as “traditional.” There may be a slight difference.
- Tom Demark Pivots from brilliant trader, Tom Demark. Those are called “D M” . And
- Camarilla Pivots which to me, look like they’re pretty useless.
Now since pivot points calculate potential support and resistance levels based on a simple formula of yesterday’s high, low, and closing price, if you pay attention to the actual support and resistance levels, the traditional support and resistance where price turned before, or supply and demand zones your chart can definitely become cluttered with lines. If you really pay attention to those, you have to put those on your chart also. If you have a plethora of lines, or your chart is formatted like is done in “supply and demand trading”, with big boxes covering the whole chart, suggesting that somewhere on this chart, the market might turn. What good is that?
If you have a whole bunch of lines on your chart, then it’s going to also be useless. Because everything is a line. Everywhere you look there’s some kind of a line. It’s actually better to get them off of the chart and remove the clutter so you can see where the market is really going. It’s going through all pivots. This is a thing that we should know by now and I’ve mentioned in a lot of my other videos, that if you can tell whether there’s a trend or a correction, during a trend it’s just going to go through all pivot points. It’s going to go through all supply and demand. During a correction it also goes through the pivot points. It also goes through supply and demand and support and resistance. It’s not really relevant to those levels.
It does a different thing which is to go to a percentage of the previous trend which is NOT supply and demand, and NOT support and resistance. It is instead a percentage of the previous trend, Fibonacci retracement levels. So for most “price action trading”, neither a trend nor a correction is going to a pivot or supply and demand.
But for pivot points it’s more useful to help gauge the end of a correction. That’s where it might actually have some use. If you know a pattern is a correction then you’re looking for an end of the correction. The pivot lines will help to guide you where it’s likely to be going. If using any of these lines helps you to feel more comfortable and seems to assist you, well that can be used as long as we know there’s no useful strategy based solely on any of those lines.
Let’s take a look at an actual chart and consider how they can be used as a part of a real professional trading strategy. So take a look at what actually happens on the chart when you put on pivots with the traditional settings. And try this on a number of different currency pairs until you see that there are many places where it IS turning or seems to be stopping, turning right at those pivot points. Notice that it is almost uncanny when you use the traditional settings. In some cases it’s close to being irrelevant. It’s not really doing anything with regard to stopping a pivot. That’s part of the cycle, but then it may come back to a point where the pivot points are becoming a lot more relevant.
I’m going to show you more about why that is. Now if I change the settings to Fibonacci, what do I actually see? It seems like it no longer has any relevance to the Fibonacci setting. To me, it doesn’t seem to be quite as useful. But there may be a place here and there where it is right on the Fibonacci level. But how many? There are a few of them. It does seem to have some relevance on some currency pairs.
Now if I change the setting to Woody’s… Woody has had some insights in the trading world in the past. Let’s just look at whether those pivots work better compared to what we just saw. If you put them on the chart and change it back and forth, as I have shown before in gold a little while ago, that will show you if it’s actually helping or not. So for the most part what I’m seeing with Woody’s is that it is just not really that relevant. Maybe a little bit. There are some places where it does seem to be coming to the line that Woody’s has shown. How many?
So then notice what happens when you put on the Tom Demark pivot point settings. And then just carefully look and notice, is this more relevant? Stop and take it on and off and see compared to traditional. Is this showing us something? Is it showing a turning point? Because at first I thought you know Tom is kind of a brilliant mathematician and maybe it has some significance. But how many of these pivot lines that are the Tom Demark setting are really showing us something? Or is it pretty irrelevant?
Okay, when I put the pivots on the classic settings I’m actually not seeing any difference between that and the traditional and I’m not sure we should see what’s the difference in the formula. It seems to be the same thing. And then again, the other thing to do is put on one setting in the same spot and change it to the other setting and you’ll see if it lining up better with turning points. And then just for good measure if you want to put on the Camarilla Pivot Point settings, what I’m seeing is that they are pretty much irrelevant and useless, not showing anything. I can’t see that they’re doing anything. So I would definitely not use those. Overall, it seems that the traditional pivot lines have the best results.
How to Trade With Pivot Points
Now let’s take a look at what you would really need to do to actually trade using pivot points. And to be able to do it in a way where it would actually have high probability. What it is that you’re doing would work. It wouldn’t be based on only blindly using pivots, only trying to get out when it approaches the pivot or getting in if it passes the pivot and not knowing anything else beyond that. Let me show you how you can take your understanding and your skill level to a higher degree of probability and excellence.
Some traders look for the market to trade either above or below a pivot point and then they look for an indicator to confirm a direction. In most cases, you can tell by looking at the price itself and the candles if something is turning and the direction it’s going. An indicator is just redundant. It’s easy to tell from the candles themselves what direction the market is going. And if it is going that direction and indicator will say yes it’s going that direction. First you see this based on price itself that its obviously going up or down, and next you check an indicator which will always indicate the same thing that you already know.
The strategies that are taught with pivot points are very close to blind random gambling rather than having the ability to read the market and know when to get in and when to get out. But if adding this one tool makes the probability scales tip in the favor of the trader, that could be all that is needed.
So is there a real secret to trading? What is this additional knowledge and skill needed to boost the number of good trades up into the “trading excellence” range? How can you use these pivots and get good results with high probability? You would need to add another level of understanding in addition to using pivots. Using pivots, just like using support and resistance or supply and demand, is not really a trading strategy.
If you can recognize that a market is forming a trend not after it’s already formed but from the very beginning, then that would be something very valuable to know and apply. There are trends on all time frames and they all form subdivisions. If you don’t know that you will be a bit lost. But if you know that a trend is in the process of forming, price will go through all the pivot points (or most of them) without stopping. If it does pause, it may pause but it’s going to keep going through. It won’t actually stop. This can be known and recognized. A very simple thing if you know how to recognize trends and corrections. If the market is forming a correction, especially on the medium to shorter time frames, and you know how to recognize the shapes of corrections and the wave structure of the subdivisions.
These corrections might end near a pivot or turn, staying above or below a pivot. But you must be able to identify the end of a correction with or without the use of the pivots. Like you can see in this video over here:
They can give you one additional level of confirmation when making trading decisions. You can learn to instantly score the probability slightly higher if it appears to be turning at or just above or below a pivot. You want to be able to identify the end of a correction and be able to do it without any other tool used, so when you do add another tool like pivots or Fibonacci, then you will have excellent high probability. And you’ll have a slight edge or slightly higher probability on many other trades. Okay so now, does that make sense to you. Let me know in the comments if you got that. And believe that you can now use that to get excellent results that actually produce increasing capital over a long period of time.
If you would like to see more about how this is done you can join us every day in our live sessions and also you can get started by enrolling in our free professional trading course.