Woodie – Forex Academy

Introduction

In the previous six lessons, we discussed pivot points right from understanding what they are, to the strategies one can apply to trade the markets. Now, let’s summarize what we’ve learned so far and move on with another exciting tool for analyzing the markets.

Pivot Point Basics

A pivot point is a technical indicator in technical analysis trading, which determines potential support and resistance levels in the market. This indicator is stationary, unlike the other indicators that move with the change in price.

The pivot points are levels that are essentially determined using the previous day’s high, low, and close price. So, every trading day, we can obtain one set of the pivot point.

What is the pivot point made up of?

There are up to six levels that make up the pivot point levels. One of the levels is the pivot point level, and the rest are support and resistance levels. The six pivot levels are symbolized as follows:

Pivot Point (PP/P)

First Support (S1), First Resistance (R1)

Second Support (S2), Second Resistance (R2)

Third Support (S3), Third Resistance (R3)

Fourth Support (S4), Fourth Resistance (R4)

Fifth Support (S5), Fifth Resistance (R5)

Note that, most of the time, we stick to the levels until S3/R3 because the price does not usually touch the levels beyond it.

How are the pivot levels calculated?

As mentioned, the pivot points are calculated using the close, high, and low of the prior trading day.

For example, the Pivot Point, First Support, and First Resistance are calculated as follows:

PP = (High + Low + Close) / 3

S1 = (2 x PP) – High

R1 = (2 x PP) – Low

Similarly, one can calculate levels until R5/S5. However, these values need not be calculated practically. There are trading platforms that automatically calculate these values.

Types of Pivot Points

There are four types of pivot points based on how the levels are calculated.

Standard
Woodie
Camarilla
Fibonacci

Most of the time, the standard pivot point levels are used.

Strategies using Pivot Points

There are several ways through which one applies pivot points. In our course, we have listed out three strategies.

Range trading strategy

According to this strategy, one can consider buying when the support level of the pivot points coincides with the support level of the range. A similar strategy can be applied for shorting as well.

Breakout Trading Strategy

As the name pretty much suggests, traders can consider going long or short when the price breaks above the resistance or below the support level.

Measuring Sentiment

Traders can use the pivot point level (PP) to determine the trend of the market. If the market breaks above the PP, it indicates a buyer’s market and vice versa.

Summing it up

The pivot point is that indicators that can be used every level of traders from beginners, intermediate to the advance trades. However, this indicator is not a standalone indicator. It must always be used in conjunction with other indicators and tools to have higher odds of favoring you. We hope you enjoyed this series on pivot points. Happy trading!

Introduction

In all the previous lessons of pivot points, we considered the traditional pivot points. But this is not the only type of pivot points that are existing. There are three other types to it as well. In this lesson, we shall cover the four different types of pivot points that exist.

Types of Pivot Points

The four types of pivot point are mentioned as follows:

Traditional Pivot point
Woodie Pivot point
Camarilla Pivot point
Fibonacci Pivot point

Since we’ve already discussed the traditional pivot point in detail, we shall be concentrating on the rest of the types. Note that, in all the different types of pivot points we will be studying, the only difference is the calculation of the pivot point levels. As far as the concept to trade using these pivot points is concerned, it remains the same as the traditional approach.

Woodie Pivot Point

The Formulae

Pivot point (P) = (High + Low + 2Close) / 4

First Resistance (R1) = (2 x P) – Low

Second Resistance (R2) = P + High – Low

First Support (S1) = (2 x P) – High

Second Support (S1) = P – High + Low

From the above formulas, we can notice that the way of calculations is pretty different from that of the traditional type. In the traditional, we considered the difference between High and Low to calculate support and resistance levels. But, in this case, consider the range as well as the close of the previous day. Some traders prefer this over the traditional pivots because it gives more weightage to the close price of the previous day.

Camarilla Pivot Points

The Formulae

P = (High + Close + Low) / 3

S1 = Close – ((High – Low) x 1.0833)

S2 = Close – ((High – Low) x 1.1666)

S3 = Close – ((High – Low) x 1.2500)

S4 = Close – ((High – Low) x 1.5000)

R4 = Close + ((High – Low) x 1.5000)

R3 = Close + ((High – Low) x 1.2500)

R2 = Close + ((High – Low) x 1.1666)

R1 = Close + ((High – Low) x 1.0833)

If we look closely, we can infer that the support and resistance levels are calculated using the range and the close price similar to the Woodie calculation. The only major difference being, in Camarilla, four levels of Support and Resistance is calculated and is multiplied by a multiplier.

The theory with which Camarilla was created is based on the concept that the price has a natural tendency to return to the mean (here, close of the previous day). So, the simple strategy here is to sell when the price reaches the R3 or R4 level and buy when the price bottoms to S3 or S4 level. However, if the price breaches the S4 or R4 level, it indicates a strong trend in the market.

Fibonacci Pivot Points

The Formulae

P = (High + Low + Close) / 3

S1 = P – ((High – Low) x 0.382)

S2 = P – ((High – Low) x 0.618)

S3 = P – ((High – Low) x 1.000)

R3 = P + ((High – Low) x 1.000)

R2 = P + ((High – Low) x 0.618)

R1 = P + ((High – Low) x 0.382)

For calculating Fibonacci level, the pivot point level is calculated using the traditional method. Then the Support and Resistance levels are obtained by finding the product of the previous day’s range and the corresponding Fib level. The most used Fib levels are 38.2%, 61.8%, and 100%. Finally, adding/subtracting this value with the pivot point yields the Support and Resistance levels.

All of these indicators will be available with most of the brokers and charting tool software. Consider trying all of these pivot points on a demo account and use the ones that work the best for you. This hence brings us to the end of this lesson as well as the concepts involved in the pivot points. In the next lesson, we’ll summarize this topic and move ahead with another interesting technical analysis tool. Cheers!

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