Introduction to the Pivot Points Indicator
It is always a good idea to use the tools that the professionals use. The Pivot Points indicator is one of those indicators that many professional traders use. Let us take a look at what this indicator is and how it could be used.
What is the Pivot Points Indicator?
A Pivot Point is a technical indicator which identifies support and resistance based on the typical price of a prior period. This indicator is often used as a basis for trend or momentum bias, as well as support and resistance levels where price may reverse.
A Pivot Point indicator typically plots seven lines. The middle line would be the Pivot Point (PP). Lines above the Pivot Point are Resistance levels (R1, R2, and R3), while lines below the Pivot Point are Support levels (S1, S2, and S3).
How the Pivot Points Indicator Works?
The middle line, which is the Pivot Point is the typical price of the prior period. A Daily Pivot Point would be the average of the high, low, and close of the prior day. A Weekly Pivot Point would be the average of the high, low, and close of the prior week. So on and so forth. This indicator plots the Pivot Point as yellow.
The Support levels below and the Resistance levels above are then derived from the Pivot Point line. Different levels have varying formulas.
This version of the Pivot Points indicator allows traders to modify the basis of the Pivot Points, whether it would be a Monthly, Weekly, or Daily Pivot Point, and even lower. It also allows traders to choose a more complex computation of the Pivot Point line. These variables can be modified under the Inputs tab of the indicator settings.
How to use the Pivot Points Indicator for MT5
One way to use the Pivot Points indicator is as a trend direction bias indicator. Trend direction is considered bullish if price is above the Pivot Point, and bearish if it is below the Pivot Point. However, the farther price is from the Pivot Point, the more likely it is to reverse back to its mean.
Another popular way to use Pivot Points is as a basis for reversals coming from the Support and Resistance levels, or even from the Pivot Point line itself.
Buy Trade Setup
When to Enter?
Open a buy order as soon as a bullish reversal candlestick pattern develops either on the Support levels or on the Pivot Point line, indicating a price rejection of the level. Set the stop loss below the pattern.
When to Exit?
Set the take profit target on the next Resistance level or Pivot Point line.
Sell Trade Setup
When to Enter?
Open a sell order as soon as a bearish reversal candlestick pattern develops either on the Resistance levels or on the Pivot Point line, indicating a price rejection of the level. Set the stop loss above the pattern.
When to Exit?
Set the take profit target on the next Support level or Pivot Point line.
Conclusion
The Pivot Points indicator is one of the most widely used technical indicator among professional traders. Institutional traders such as those trading for big financial institutions also use such type of indicator. It would be wise to use the same indicators they are using so that we would also know the levels that they are considering.
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