Trading the Probabilities with Pivot Points

Trading the Probabilities with Pivot Points

Trading with key areas of support and resistance is one way that traders can help keep the probabilities on their side, and to gain a trading edge.

Trading the Probabilities with Pivot Points
Trading the Probabilities with Pivot Points Getty Images

One of the most commonly used indicators that traders plot on their charts are Pivot Points. Almost every charting platform, including the Nadex platform allows you to easily plot pivot points, which can serve as key areas of support and resistance.

Investopedia provides a very nice explanation of how to trade with pivot points, if you are not familiar with them, but you want to learn more.

Trading with pivot points starts with the Current Pivot Point, which is calculated as follows:

The Current Pivot Point is the sum of High (Previous) + Low (Previous) + Close (Previous), divided by 3

Next you have three Resistance Levels above the pivot:

  • Resistance 1 = (2 x Pivot Point) – Low (previous period)
  • Resistance 2 = (Pivot Point – Support 1) + Resistance 1
  • Resistance 3 = (Pivot Point – Support 2) + Resistance 2

You also have three Support Levels below the pivot:

  • Support 1 = (2 x Pivot Point) – High (previous period)
  • Support 2 = Pivot Point – (Resistance 1 – Support 1)
  • Support 3 = Pivot Point – (Resistance 2 – Support 2)

Each of these levels can act as support or resistance as shown on the chart below:

Trading the Probabilities with Pivot Points

15-Minute Nadex Chart of the GBP/USD on Monday, March 27

The Pivot Point tool can be on the Nadex Technical/Indicator Tab at the bottomof the chart. The Black dotted line is the Current (Daily) Pivot. The red dotted lines above are the R1, R2 and R3 resistance lines. The green dotted lines below are the S1, S2 and S3 support lines.

Each level can act as resistance or support. On this particular day, the EUR/USD traded sideways on the Current/Daily pivot line. On one occasion it traveled up to the R1 Resistance Line, which held, and the market moved back downward. The further the market moves away from the Current/Daily Pivot, the greater the probabilities are that a reversal will occur.

Caution: If the market breaks through a resistance line, then it is possible for that line to serve as a new area of support. The same is true if the market dives through S1 for example, then S1 could turn into a resistance level as the market heads downward.

Trading Pivot Points with Binary Options and Nadex Spreads

  • Binary Options: If you see the market bounce and reverse off a key resistance pivot, you might want to consider looking at the nearest expiry, and selling from the first strike price at or above the Pivot Point. The opposite would be the case if the market is bouncing off a key support level. In that case you would buy from the first strike price at or below the support level.
  • Nadex Spreads: Once you have confirmation of a bounce off a support or resistance level, then you may have the opportunity to scalp a few pips on the bounce.

A quick Google search will yield a wealth of information on trading with Pivot Points, but once you understand them, they can give you an edge.

The information contained above may have been prepared by independent third parties contracted by Nadex. In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Please note, exchange fees may not be included in all examples provided. View the current Nadex fee schedule. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representations or warranties are given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk and any trading decisions that you make are solely your responsibility. Trading on Nadex involves financial risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results. Nadex contracts are based on underlying asset classes including forex, stock index futures, commodity futures, cryptocurrencies, and economic events.

Trading can be volatile and investors risk losing their investment on any given transaction. However, the design of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.