What Are Pivot Points —and How to Crypto Trade with Them

Intermediate

Jan 22, 2021

15 min read

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We've all got to start somewhere, and familiarizing ourselves with different technical analysis types in crypto is no different. One thing is for sure: Novice traders often struggle to find a road map to navigate the crypto markets. Active crypto enthusiasts will often rack up losses, only to realize all they lack is a sense about market direction. Well, pivot points come in handy for deciphering these challenges, mainly for entering and exiting positions.

Pivot points refer to a technical analysis tool that provides more apparent price levels as the turning point, resistance and supports over different periods. The pivot points are based on the price action of the previous day's trading.

In technical analysis, pivot points help determine a sensitive point on the price chart, a crossing that might cause a shift in market sentiment. The pivot point is based on the previous high, low and close prices. The method also provides critical levels of support and resistance in the price action surrounding the pivot point. Ultimately, you can easily use the pivot points to find reliable buy and sell signals, and to determine exit points along with adequate stop-loss placement.

Table of Contents

How Do Pivot Points Work?

Typically, traders use pivot points to determine a key level, in order to watch out for a turn in the trend. But additionally, they also provide traders with a set of resistance and support levels. The standard pivot points are made up of one central pivot level, followed by two support and resistance levels displayed above and below the central pivot point.

This technical analysis indicator relies on a previous period’s high, low and close price for a specific period to define future support. While it involves calculations to determine the points. Though this indicator is commonly used in traditional stocks market to determine market trends, it’s certainly applicable in crypto trading. In fact, most crypto traders agree that pivot points are one of the most valued indicators for analyzing a price movement precisely. And it's a surprisingly suitable tool for day traders, too.

Next, we’ll dive deeper into its technicalities to help you understand what to look for. This includes pivot point levels, calculations, applications, and more.

Pivot Point Levels

A typical five-point system involves calculating the primary point first. It's based on the results a trader arrive at for other key resistance and support levels.

The key levels are:

The Pivot Point – P
Resistance level 1 – R1
Resistance level 2 – R2
Support level 1 – S1
Support level 2 – S2

It is possible to calculate the Pivot Point for different timeframes like 4-hour- 1-hour or weekly and daily charts. And we’ll take BTCUSD as an example.

Take a look at Bitcoin, BTCUSD, levels spanning a few days around Jan. 20, 2021. Here, we will determine P, R1, R2, S1, and S2 for each day from Jan.15 to Jan.20.

On Jan.15, Bitcoin’s price fell to $34,543 and continued to trade in a narrow range between S1 and R1 in the next five days. Notice how on the next day, P adjusts itself, reflecting the ongoing price action. Along with it, S1, S2 are also pulled to a higher level. On the third day, the movement loses momentum, S1 and R1 withdraw. The new R1 resists the price action on the fourth day, and on Jan. 20, a fall below P invites more selling.

The pivot point analysis helps the trader in this situation to understand that the move is mature enough for a direction; this is confirmed on the fifth day when the price falls below the previous day’s pivot point. On Jan. 20, Bitcoin is trading around $34,359, below the P and S1 and challenging S2. A breakdown here is likely to increase bearish momentum.

What Are The Types of Pivot Points (PP)?

In technical analysis, we can distinguish five different types of pivot points, namely:

Traders have their preferences among the different types of pivot points. Each type has its unique calculation, especially measuring resistances and supports varying across different PP types. The Standard Pivot Point is the most popular among traders, along with Fibonacci Pivot Point.

Moving forward, we’re going to break down the different types of pivot points and how they are calculated.

Standard Pivot Point

This variant of the pivot point is commonly referred to as the Classical Pivot or Floor Pivot Points, interchangeably. It remains a favorite for beginners and even advanced traders for a reason.

The calculation of the baseline Pivot Point (P) involves summing up the high, low, and close prices and dividing the result by 3.

P = (High + Low + Close) / 3.

Once you determine the Pivot Price, use it to calculate the Resistance and Support levels.

S1 = (Pivot Value X 2) – Yesterday’s High
R1 = (Pivot Value X 2) – Yesterday’s Low
S2 = Pivot Value – (High – Low)
R2 = Pivot Value + (High – Low)

It is also possible to plot additional layers of support and resistance levels like the (R3, R4, S3, S4, and more). What’s great about it is the pivot point indicator is customizable to display several depths of support and resistance lines based on your trading needs.

Camarilla Pivot Point

Camarilla Pivot Point was invented back in the 1980s. The analysis includes using the previous day’s closing price along with high and low prices to compute the P.

A peculiarity of the Camarilla Pivot system is that it plots four resistance levels and four support levels, totaling nine levels, including the Pivot Point. And what stands out from the rest is its presence of special multipliers used in the formula to calculate R1, R2, R3, R4, S1, S2, S3, and S4.

The method with which Camarilla Pivot levels are calculated is below:

R4 = Closing + ((High -Low) x 1.5000)
R3 = Closing + ((High -Low) x 1.2500)
R2 = Closing + ((High -Low) x 1.1666)
R1 = Closing + ((High -Low x 1.0833)
P = (High + Low + Closing) / 3
S1 = Closing – ((High -Low) x 1.0833)
S2 = Closing – ((High -Low) x 1.1666)
S3 = Closing – ((High -Low) x 1.2500)
S4 = Closing – ((High-Low) x 1.5000)

Camarilla Pivot’s idea is to follow the principle that markets are cyclical, and over time the price of any cryptocurrency will revert to its average price. At the same time, Camarilla Pivots help crypto traders identify the intensity of the bullish/bearish trend days.

Here is the best way to interpret the Camarilla Pivots:

If the price moves beyond the resistance level R4, we have a strong intraday bullish trend.
Conversely, if the price moves beyond the support level S4, we have a strong intraday bearish trend.

Denmark Pivot Point

Tom Denmark introduced this system, and it has a conditional nature for calculating P, R, and S, based on whether the opening price is higher than the close price or not. The value derived based on the condition involving open, close, high, and low is termed ‘X.’

First, ‘X’ is calculated:

If the closing price is higher than the opening price (i.e., bullish candle), then X = (2 x High) + Low + Close. If the closing price is lower than the opening price (i.e., bearish candle), then X = High + (2 x Low) + Close.

Additionally, if Close = Open, then X = High + Low + (2 x Close)

Once X is determined, then use,

Pivot Point = X/4
Resistance 1 = X/2 – Low
Support 1 = X/2 – High.

Fibonacci Pivot Point

You might be familiar with the 38.2% and 61.8% Fibonacci retracement levels. But, there is also a PP system incorporating Fibonacci levels. The methods are very similar to those you saw in the Standard Pivot Point system, except for the introduction of Fibonacci level multipliers while calculating the resistance and support.

P is calculated in the same way as in the Standard Pivot – as an average of high, low, and close. However, for calculating resistance and support, Fibonacci multipliers are introduced as below:

Resistance 1 = Pivot + (.382 * (High – Low))
Resistance 2 = Pivot + (.618 * (High – Low))
Resistance 3 = Pivot + (1 * (High – Low))
Pivot Point = (High + Low + Close) / 3
Support 3 = Pivot – (1 * (High – Low))
Support 2 = Pivot – (.618 * (High – Low))
Support 1 = Pivot – (.382 * (High – Low))

Woodie’s Pivot Point

More weightage is given to the recent price action in Woodie’s Pivot Point compared to the Standard Pivot. To calculate the PP and other key levels, the following equations are used:

R2 = PP + (High – Low)
R1 = (2 X PP) – Low
P = (High + Low) + (2 x Closing Price) / 4
S1 = (2 X PP) – High
S2 = PP – (High + Low)

How Are Pivot Points Different From Other Technical Indicators?

Pivot Point can be a leading indicator, unlike many other common indicators like the moving averages. Instead of relying on the current price action, Pivot Point systems use the previous period price levels to determine critical points. Such an approach provides the traders with a clear framework to plan their trading. The Pivot Point levels are static until the start of the next trading session. Pivot Points’ main advantage is that they provide objective support and resistance levels that are not merely random lines on the crypto chart.

How to Crypto Trade with Pivot Points

The most popular ways to apply Pivot Points to crypto trading are:

Enter a breakout trade of a pivot point;
Or, to trade the bounce off of pivot points

In fast-moving cryptocurrencies, pivot points can provide early signals of the strength and weakness of a trend. But first, here’s how to correctly draw a pivot point.

The Drawings of Pivot Points

Almost all the trading platforms or charting software provide Pivot Point indicators that are usually automated. However, it’s still great to understand the concept and be hands-on with it if there are any doubts.

To critically assess the crypto market, the pivot point market indicator needs to have these criteria within the chart.

PP level
R1 and S1
R2 and S2
R3 and S3

A good note here is to use unique colors to tag each level to avoid overlaps. To start, you can select a monotone color as a PP baseline. Then categorize the R1, R2, and R3 level with another tone to differentiate from the rest. Select another vibrant color to highlight the contrast of S1, S2, and S3. The key here is to make sure these levels are plotted distinctively to help you easily assess the levels within a few glance.

How to Day Trade with Pivot Points?

Pivot Points are widely used in intraday trading. In the BTCUSD chart below, the most effective strategy would have been trying to profit from scalping the bounces off R1 and S1 levels. Through its sheer popularity alone, Pivot Points brings in a fair amount of predictive value. Nevertheless, it is a fact that the levels are calculated based on real market action on the previous day or period and often acts as the right framework to profit from market action.

Typically pivot points act as a leading indicator and forewarn traders about possible turning points. Thus, you can use them as trade entry points, stop-losses, or take-profit levels.

Traders generally expect less than half of the moves to probe beyond R1 or S1, while S3 or R3 are challenged rarely, on an intraday basis. Hence, it is crucial to understand how a market is shaping up while deploying your intraday strategy.

As you have now understood Pivot Points’ basic framework, let’s explore two trading strategies with them: Breakout Trading and Bounce Trading.

Breakout Trade

Pivot points are also a handy tool that can be used for breakout trading. A move beyond a pivot point can indicate a potential change in the underlying market sentiment, thereby providing us with clear entry points.

If the price breaks above a pivot point level, you can enter into a long trade, preferably using a stop-loss order below the central PP. Such breakouts usually happen in the morning session. On the contrary, if the breakout direction is on the downside, you can go short using a stop-loss order just below the central PP.

In case of a bullish breakout, you can use R1 and then R2 as high probability profit-targets, and in case of a bearish breakout, S1 and S2 are the potential targets.

In case the R4 or S4 pivots are taken out in intraday action, it is better to be positioned in the direction of the move as strong trend days usually emerge from these types of breakouts. Such trend days are rare, not common, but highly profitable if you can catch one at the right time.

Bounce Trading

A high probability trade setup for intraday is bounce trading. The bounce trading strategy attempts to profit from buying near support with the expectation that the pivot point will hold and sell near resistance, expecting that the price will drop.

The most common way to apply this trading strategy is to join the bounce off from Pivot Point and target S1 or R1 according to the bounce’s direction.

As most of the intraday moves fizzle out before touching S2 or R2, mean reversion trades can be meaningful near those levels.

The Limitations of Pivot Points

Pivot Points are best suited for intraday trading, and as you have seen earlier, it is based on a simple calculation, which might not be compatible with swing or position trading.

It is common for prices to disregard pivot levels completely. Hence, there is no guarantee that the price will reverse or make any significant directional move around such predefined points.

Pivot Points’ major deficiency is that when volatility is high, the price fluctuations are too wide to provide meaningful trading signals.

Therefore, many traders use Pivot Points along with and other technical analysis tools as a confluence to smoothen out the drawbacks inherent in this approach to the market. One of the suggested combinations is using PP with Bollinger Bands to develop a better trading style incorporating volatility considerations. It will be prudent to step aside when Bollinger bands indicate high volatility; unless the volatility expansion is in your favor in an already established position.

Key Considerations When Trading With Pivot Points

When trading with Pivot Points, it is essential to be aware of critical levels over multiple periods and not just the latest Pivot Levels based on the previous session. Looking at numerous periods will help gain a better perspective and gauge market levels if the price trades beyond R4 or S4.

When prices cross R4 levels, it might be tempting to go short; or go long when price gaps below S4, but it is usually a wrong idea as such price action usually indicates strong trend days and might not be suitable for range trading.

Pivot Points work best in assets that attract high volume price action. Hence, it is better to stick with cryptocurrencies with the highest trading volume; avoid low volume digital currencies.

It is essential to not place your stop-loss orders at easily guessable or noticeable levels – like right at S1 or R1.

Risk Management

Always trade with a position size that translates to a risk level proportional to your overall portfolio size and trading strategy.

If you haven’t defined the maximum risk per trade as a percentage of your overall trading capital, make it a priority to set it first. Once you have decided that, which should be less than 2% of total trading capital, use Pivot R1 or S1 as a target to enter a trade breakout or bouncing off around P. Here, the distance to stop-loss from the entry should be ideally less than half of that from the target price.

Even though you have a higher probability of success while targeting S1 or R1 in a bounce trading from P, it is still vital to make sure that the targeted profit should be substantially higher than the risk taken.

If you are trading long in a bear market, it is prudent to take quick profits while in a bull market. Though, it might be worthwhile to hang on to a winning trade.

Should You Use Pivot Points?

Pivot Points are suitable for beginning traders or traders struggling to develop a workable trading plan. Pivot Points are a great tool to build clarity and consistency in your trading.

Suppose you are confused about getting the right entry price or deciding on the right time to exit. In that case, this is a practical approach to tackle the volatility in the cryptocurrency market.

By providing entry, target, and stop-loss, the Pivot Point method takes out the uncertainty in your trading plan. Knowing the risk and reward clearly before placing a trade is half the battle won.

Closing Thoughts

The Pivot Point approach to trading has many advantages that can make it an indispensable tool for you. The system allows you to trade with the flow of the market, and it has shown high accuracy in the generated signals, probably because a large number of traders are using the system to time the markets.

For many amateur traders, Pivot Points will clarify where to enter a trade, book profits, and place stop-loss orders.