Price action and pivot point trading – complete guide
The purpose of this publication is to show you how to invest with price action and pivot levels.
This is the best combination if you want to catch bigger moves at early stage.
We will immediately move on to examples and practical knowledge. At the end you will find chapters with additional commentary.
Guide published at https://pivot-point-trading.com. Do not copy.
Pivot levels have changed my approach to trading. They turned out to be a great help with:
- Selecting better levels to close transactions and take profit
- Opening transactions at turning points (beginning of correction or new trend)
On the Internet you can find a lot of information about a very simple, basic application of pivot levels. Meanwhile, there is an opportunity to build really interesting and effective strategies. One of the most effective combinations is price action and pivot levels.
1. Pivot point – short introduction
We have several types of Pivots, but in this book we will focus on the most popular, classic version of Pivot Point.
Pivot Points are support and resistance lines calculated based on the previous period. So we have:
- Daily pivot point lines – calculated based on the previous day
- Weekly pivot point lines – calculated based on the previous week
- Monthly pivot point lines – calculated based on the previous month
- Yearly pivot point lines – calculated based on the previous year
If you prefer day trading and lower time frames (5m, 15m) then lower pivot points like daily pivot points are best for you. If you keep your trade open longer and prefer swing trading, then higher pivot points like weekly pivot points or monthly pivot points will be better for you.
Construction of Pivot levels is simple:
- The middle line is a pivot. It can serve as support (if the price is above) or resistance (if the price is below).
- Above the Pivot line we have resistance lines R, numbered R1, R2, R3.
- Below Pivot line we have support lines S, numbered S1, S2, S3.
There are also M (middle) lines, located in the middle, between the different levels.
Now, I just want to go straight to the examples. If you want to understand the basics better you will find many articles for beginners on the Internet or in oother sections of my blog.
2. Before we move on to examples – a few important remarks
Some combinations of price pattern and pivot point can be very effective. However, as with any strategy, combining pivot point and price pattern does not give a 100% winning rate. That’s why proper risk management and capital protection is so important. One bad trade with bad risk management can cause big losses – take away the profits made over a long period of time or even reset the account.
In this guide I focus on the best possible presentation of the strategy of combining price action and pivot point and how to enter a transaction. Remember, however, that risk and money management is the foundation for the success of any strategy.
2.2. Current trend line
In the examples I mention the current trend line. It is simply a line of support or resistance drawn from the last movement. I marked it on the first example of Pinbars/Hammers.
I did not mark it on the other charts because I wanted them to be as clear as possible.
I write about the strategy of using the breakthrough of the support/resistance line in the final chapters.
2.3. Opening positions
The appearance of a price formation near a pivot point does not mean that you have to open a position automatically. You often need additional confirmation. I focus on breaking the trend line. If you have your favorite oscillator signal you can also use it in your strategy as an additional confirmation.
On the following examples I focus more on showing a specific price pattern and pivot as clearly as possible.
3. Pivot Points and bullish price action
In this section I show examples of popular bullish price action that occur near pivot lines. As we are talking about bullish price action we are looking for opportunities to buy (take a long position). That is why we are interested in levels like:
- Support lines S1, S2, S3 (i.e. support lines below Pivot)
- Center – pivot line
- M lines below Pivot
3.1. Pinbars / Hammers
Popular candle, easy to notice. Short body, long shadow. We are looking for it at the end of move down.
Example – USD/JPY, 15m timeframe, daily Pivot Points:
The long shade and short body indicate that there is a large demand zone in the area. If you see a pin bar, it means that this level is the place where short positions are closed and long positions are opened. On the example above there are several pin bars, very near to the daily S2 level.
Opening position – two possible strategies:
- As soon as the pin bar is completed
- When the pin bar will end up forming and there will be a breakthrough of an important trend line (marked in the example)
Protection – stop loss, quite close, just under the pin bar or in close proximity to it.
Pin bar can also form during movement and give false signals. That is why we take into account mainly pin bars, which appear very close to important support levels like S1, S2, S3.
The higher the time frame the better the effectiveness and importance of this formation. For example, a pin bar on a weekly chart may indicate a reversal of the trend or the start of a multi-weekly trend up.
3.2. Bullish engulfing
Candle formation consisting of two candles. The first with a smaller body. The second body contains the body of the first, smaller candle.
Example. AUDUSD with daily pivot:
Bullish engulfing appears quite often. It has good effectiveness IF it appears near an important support.
It also has a tendency to appear during the trend movement, thus giving false signals. Therefore, I pay attention to bullish engulfing only if it takes place on the mentioned important support levels.
Entering a long position. I check if the bullish engulfing is close to an important S or M line with pivot point levels. I then wait for the current trend line to break, possibly confirmed by an oscillator signal.
In the above example you can clearly see that the move down stopped near the M line (between S1 and S2). Then a pin bar-like candle appeared, followed by a second candle with a body that had an opening lower and closing higher than the previous one. This is our bullish engulfing. Due to the location it was a good moment to take a long position.
Stop loss below bullish engulfing. Not very wide. If, after bullish engulfing, there will be a close below that pattern I do not want to risk it here.
3.3. Inverted hammer
Small body with long upper shadow.
Example. NZDUSD, weekly time frame, yearly Pivot levels:
This is quite a rare price pattern, especially when combined with Pivot Point levels. Therefore, if I see that it appears near an important support, I pay special attention to this candle and consider the trade.
In the example above we see the NZD/USD weekly chart. For a long time we had strong down trend. It stopped around yearly S1 support. First, after the first contact of the candle with S1 level, you can see a bullish engulfing pattern. Then, however, there was an attempt to move down even more. After two weeks (two candles), an inverted hammer marked with an arrow appeared. This was the beginning of a stronger upward movement.
Opening a transaction. Here I always wait for additional confirmation. Most often it will be a break in the current trend line, sometimes a signal from the oscillator.
Stop loss close, but not too narrow.
As I mentioned, this is a rare price pattern. When it appears near pivot lines I prepare to open a long transaction after meeting certain conditions (usually just a breakthrough of the trend line).
3.4. Piercing line
Two candle formation. First candle is bearish. Second candle open lower but close above the middle of previous candle.
Example. EURUSD, daily time frame, monthly Pivot Points:
In my experience this candle formation works OK, but it is not as effective as for example the Pin bar. This does not mean that you have to skip it. In the case of formations such as piercing line, where I know that the effectiveness is different, I always try to get additional confirmation.
It could be:
- Additional oscillator signal
- Breaking through trend line
- A next candle close above the piercing line formation
In addition, I ignore piercing line formations that did not have contact with S levels. There are some patterns I trade that were nearby – just above or just below S levels. However, in case of piercing line, due to its slightly worse effectiveness, I want this contact with Pivot levels to be as close as possible.
In the above example, we see that the move down stopped on the monthly S1 support line. A piercing line formation appeared, marked with an arrow. However, we did not immediately have a rebound and upward movement, but sideways movement. Therefore, it was worth waiting for an additional signal. Personally, I would have waited here for the zero line break on the CCI and for the white candle to close above the piercing line formation.
Stop loss level quite close, just below the piercing line formation.
3.5. Morning star
Candle similar to doji (small body in the middle, upper and lower shadows), at the end of move down:
Example. GBPUSD, weekly time frame, monthly Pivot Points:
A rare formation with good effectiveness when it appears at important support.
It is rare mainly because it consists of three candles, where the middle one should resemble doji.
If I notice a morning star near an important support, I draw line of support and resistance and prepare to open a long position.
Entering the long position. Here a lot depends on where I noticed the morning star.
Scenario 1 – the morning formation has appeared at important support level. Then I enter a long position as soon as the last (third) candle of the formation is formed.
Scenario 2 – Morning Star formation appeared at support, but there are signals that downward movement can continue. I am waiting for important confirmation that I should take a long position – break through the trend line, possibly combined with an oscillator signal.
In every scenario, stop loss it is quite close.
3.6. Bullish inside
Bullish candle inside bearish candle.
Example. DAX, 4-hour time frame, weekly Pivot Points:
Like bullish engulfing, it can appear during a trend and give false signals. Therefore, I pay attention to bullish inside patterns only around important support levels.
Just like in the morning star, I use two entry scenarios here.
1) Bullish inside at important level of support S, especially in the higher time frame – I enter immediately.
2) Bullish inside at support level but I have doubts (data, strong down trend, etc.) – I am waiting for additional confirmation. As a minimum, breaking through trend line and possible signal from the oscillator.
Stop loss close.
4. Pivot Point and bearish price action – examples
In this section I show examples of popular bearish price action pattern that occur near pivot lines. As we are talking about bearish price action we are looking for opportunities to sell (take a short position). That is why we are interested in levels like:
- Resistance R1, R2, R3
- Center – pivot line
- M lines between pivot and R3
4.1. Shooting star / bearish pin bar
Small body with long upper shadow:
Example. AUSDUSD, daily time frame, monthly Pivot Points:
Bearish pin bar marked with an arrow. As you can see, it took place at monthly resistance R1. Pay attention to the long shadow (tail) of the candle. The bulls initially went much higher, but the support turned out to be very strong and candle close below it.
I play the short position with the help of the bearish pin bar in two ways:
1) If this happens directly at R level and I see a clean close under the level as in the example, then I open a short position as soon as the bearish pin bar is finished forming.
2) When a bearish pin bar candle appears near an important R-level, but there will be no clear contact, then I observe situation. I am waiting for additional confirmation (from the oscillator, breaking the support line etc.). Additionally in this scenario I want to see one of the next candles closing below the bearish pin bar.
Defensive stop loss order just above the bearish pin bar candle.
Remember that this candle likes to appear during the trend movement. It may seem that the movement ends, but in fact it continues after a short break. This is why you are looking for a bearish pin bar near R levels and usually wait for confirmation. This makes it much easier to avoid false signals from the bearish pin bar.
4.2. Bearish engulfing
The formation when a bearish candle covers the entire previous bullish candle. That is, it opened higher and closed lower than the previous bullish candle.
Example. Gold, 1-hour time frame, weekly Pivot Points:
Bearish engulfing often appears at the beginning of the correction or the new trend down.
In the example above we can see how after a strong sale-off there was an upward correction. It stopped at the weekly pivot point. Buyers had no strength to close above pivot point. There was a bearish engulfing formation. As you can see, it started a strong move down.
Opening a position. As soon as a bearish engulfing appears or after an additional confirmation (breaking the trend line or an oscillator confirmation).
Stop loss close.
Sometimes bearish engulfing can be difficult to notice because candle no. 2 is only marginally larger than candle no. 1 (although technically this is the correct bearish engulfing). That is why it is worth to use here a small help from programs/scripts marking this candlestick pattern.
4.3. Dark Cloud
Candle formation less frequent than bearish engulfing. First candle bullish. Second bearish – open higher than first one but close below the middle of the first candle.
Example. USDCAD, weekly time frame, yearly Pivot Points:
Quite rare candle formation. Especially important at higher intervals and when it appears in the area of important resistance.
Entering a short transaction – after confirmation. Usually I wait for break through support trend line.
Stop loss close, not far from the top. If after dark cloud there is a bullish candle that will close above pattern, for me it is a cancellation of this pattern.
Quite rare price formation, requiring additional confirmation. It means indecisiveness among investors. Very narrow body and short shadows on both sides.
If doji appears near the R-level, it means that the resistance works and downward movement is possible. However, additional confirmation is needed. This is well illustrated by the example above.
Here we have two doji candles marked with arrows. The first one is more like a falling star, but it shows the same thing – investors’ hesitation. It also appears exactly at an important resistance – weekly R1 level. For me, this is information that a short trade is possible. However, there was no clear breaking of the upward trend line or sales signal from the oscillator. Thus a short position should not be opened here.
Next week a similar situation (second arrow). The doji candle just above the weekly R1 level, in front of line M. Again, we wait for confirmation. It is clear that there is a break in the current up trend line. Additionally, there was a signal from the oscillator. Of course, there was also a confirmation of the price itself – after the doji we saw a bearish candle immediately.
A defensive stop loss order quite close above doji, but not very narrow.
Mirror reflection of the morning star.
Example. GBPUSD, daily time frame, monthly Pivot Points:
A rare formation. Mainly because it consists of three candles, where the middle one should resemble a doji.
If I notice an evening star near an important resistance, I draw support trend lines.
Entering a short position. Here a lot depends on where I noticed the evening star.
Scenario 1 – the evening formation has appeared at a significant resistance level. Then I enter a short position immediately after the formation’s last (third) candle.
Scenario 2 – the evening star formation appeared at resistance, but there are signals that upward movement can continue. I am waiting for an confirmation that I should take a short position – break through trend line, possibly combined with an oscillator signal.
In each case stop loss scenario quite close, above the formation. The appearance of a bullish candle that closes above the formation is a negation of this price pattern.
4.6. Hanging man
Example. USDJPY, 4-hour time frame, weekly time frame:
An interesting formation, but I trade it very rarely. It is simply so rarely observed.
If I am going to take a short position after hanging man pattern, I want it to appear at some important point of resistance. If this condition is met and I am convinced that the resistance is important and there can be at least a small correction, I open a short position immediately. Stop loss is quite close.
It is worth looking for this price pattern especially at higher time intervals. If you notice a hanging man on a higher time frame, near a significant resistance, there may be a good chance to make a bigger correction or change the trend from here.
4.7. Bearish inside
Bearish candle inside bullish candle.
Example. DAX, 1-hour time frame, weekly Pivot Points:
Like bullish engulfing, it can appear during a trend and give false signals. Therefore, I pay attention to it only around important resistance levels.
I use two entry scenarios here:
1) Bearish inside at important level of resistance R, especially in the higher time frame – I enter short immediately.
2) Bearish inside at resistance level but I have doubts (data, strong up trend, etc.) – I am waiting for additional confirmation. As a minimum, breaking through trend time line and possible signal from the oscillator.
5. Signals and confirmations
5.1. What is the best confirmation of entry into a transaction?
There is no single answer here. There are different traders with different approaches to trading.
The general answer is this – the best is the signal or confirmation that has worked best in backtesting. You should not come up with random methods and check them live. Test and see how they worked out in the past. There are so many instruments, time frames, markets that is hard to find one universal signal or confirmation.
A more specific answer. In my plan I use mainly two ways to confirm the entrance:
1) Powerful setups – entry right away. Price action appears at a very important level, ideally at a higher time frame. For example, if on a daily time frame (one candle = one day) I see a pin bar with a long shadow at the monthly S2 support level, this is a very important information that buyers are at least trying to catch bottom and move market higher. With proper risk management I can enter a long transaction here. Pin bars at important level gives pretty good signals with good win ratio so I am willing to take a risk right at this level.
2) I am waiting for confirmation. I draw current trend lines. I wait for break through trend line to take a position. I also like to have the confirmation from the oscillator. My favourites are CCI, Stochastic and RSI.
5.2. Signals from trend lines
Simple approach works best. Same is with trend lines as signal to open a trade:
- find a valid trend line (that means price is reacting with trend line)
- wait for price to break through trend line
If this happens near important pivot levels then we have a good chance to open a profitable trade.
I like to look for trend lines with at least 3 touches from price:
When it comes to opening a trade you have two options:
- open a trade right after trend line was broken. Wait for candle to close below trend line and you open a trade – that would be nr 1 marked on chart below
- wait for correction after a break and open a trade with better price – that would be nr 2 marked on chart
5.3. Signals from oscillators
You can also wait for confirmation from oscillators. The best thing to do is to backtest signals based on price history.
In my case I use mostly CCI with settings 21, 34 or 50 (depends from instrument and time frame). I usually wait for break through 0 line. Here is an example of that:
Again, if you like to use other oscillator that is fine. Just backtest it and make sure that it worked in the past and it gives you valid signals to open a position.
5.4. Setting targets
The guide focused mainly on showing how to open positions. What about closing positions and taking profit? I have decided not to discuss this topic, because I wanted to focus primarily on opening a position with Pivot Points.
However, it is true that no matter how good an entry is, it is crucial to take profit at the best possible moment. This is a broad topic and I plan to write a separate publication on the subject.
At this point, I can certainly give you the following advice.
Decide what the nature of the transaction is. Do you hunt for full swing move and want to keep your position open for many days? Or do you want to close it as soon as possible and take smaller profit?
I like to divide closing positions into 2-3 stages. So-called partial take profit. My favourite combination is a mix of pivot levels and moving average 100. This average works very often as at least a temporary stop for price. An example of closing a trade:
- I’m opening a long transaction near level S1
- The first take profit target is on 100 MA. If it is hit, I increase the stop loss order for break even.
- The second target is resistance R1. If it is hit, for the remaining open positions I increase the stop loss to 100 MA.
- The third target is R2 resistance. Here I close the rest.
This is the approach that I use most often.
How partial take profit looks in practice?
Here is an example. A short position. Profit taken at 4 levels (lines S and M). The last level is weekly S3, where exactly the movement ended:
Of course you can modify that approach. Here I want to show you first of all that:
- You don’t have to take profit in one place – you can break it up into several levels
- It is important to move up the stop loss so that you can break even as quickly as possible
- The combination of an average of 100 (or another e.g. 50 or 200) and pivot levels gives you immediately important information about the best places to take profit and close (part of) positions.
Another thing. Sometimes with the help of pivot levels you will be able to close the position and take profit exactly at the top/bottom, because the movement will end at R2/S2 level. Great, just enjoy it. However, this should not be your goal. This is a mistake that many traders make, and I have fought against it too.
The point is not to guess where the traffic will end. It’s about having a strategy that says clearly where to take the profit. You can use pivot levels and moving average as shown above. You can simply move the defensive stop loss order. This is your strategy and you decide which approach is best for you. Just keep in mind that when you open a position, your plan should specify exactly where you will take the profits if the transaction goes your way.
5.5. Does price has to touch the pivot levels?
On the above examples I showed situations when price action takes place practically directly at a given pivot level. I did it on purpose to make the charts and situation as clear as possible.
However, in everyday trading we will have two types of potential opportunities to open a trade with the help of pivot point and price action:
- Price action directly at important levels R, S (as shown in the above examples)
- Price action near important levels R, S
It is always worth waiting for additional confirmation (breaking the trend line, oscillator signal).
I usually favour price action, which takes place directly at pivot levels. However, there are days when these levels are minimally shot through. Then I wait for confirmation.
5.6. Multiple time frame
It is important to analyse the situation in several time frames, even if you have a favourite one, from which you are looking for signals.
Let’s assume that you are looking for a 30m or 1h time frame swing transaction based on a weekly pivot point. This is a good approach, allowing you to catch slightly bigger moves.
You are looking for a price pattern like I showed you in this book. You should look for them on 30m, 1h, 4h and daily intervals. There is no single rule here – sometimes a significant price pattern is formed quickly on the 1h interval and sometimes you will need more time and will notice it on the 4h interval. So do not stick only to single time frame when you look for patterns.
5.7. Helpful software for finding price action
Each trader has a different experience. Some are very good at trading with price action, others do not feel comfortable to trade with price. If you have any doubts, it is worth to use the tools that suggest the occurrence of given candle patterns. You will find them in TradingView. If you are using another platform and there is no such tool there is a good chance that there is an external script for that. For example for Metatrader4 I use Price Pattern Recognition Master. Try to find similar software for your platform.
5.8. How to master trading with price action and pivot points
First of all, backtesting. Unfortunately, there are few backtesting programs that will draw the right pivot levels.
In my case it usually looks like this. I load the chart for a longer period of time back (e.g. several years). I put pivot levels on it. Sometimes I add the previously mentioned price action tool (and sometimes I analyse the naked price action and pivot levels, without other tools). Then I analyse setups from the past, which took place near pivot points.
This is not an ideal solution, but it allows you to check how a given combination of price action and pivot levels worked on a given instrument in the past.
5.9. Do you only trade price patterns and pivot or something else?
In this publication I focused on showing how to use the combination of price action with pivot point levels. I think it is one of the best combinations in trading – we use price action near potential pivot points. It is worth adding it to your strategy.
The question is whether to trade only this combination of price action and pivot lines?
No. Just add these strategies to your trading plan. Personally, there are several different sets of strategies in my trading plan, such as
- Combination of price action and pivot levels
- Combination of price patterns and pivot levels
- Swing strategies
- Divergence and pivots
- Breakout strategies
- And so on.
I will present them in separate guides.
I encourage you above all to master trading based on a combination of price action and pivot levels. Add this knowledge to other strategies you use in trading.