Fibonacci and Pivot Points – trading guide
What are Pivot points?
I want to show you how you can be more profitable by combining two leading indicators: Fibonacci and Pivot Points.
First, a short introduction to Pivot Points. The topic is wide and you only need some basic understanding of Pivot points, because the main trading tool will still be Fibonacci.
Pivot points are a set of horizontal lines calculated on the previous bars. There is a whole mathematical formula behind it, but as a result, you get the Pivot point line, which is always in the middle.
Above the Pivot line, there are also the resistance lines called R1, R2, R3 (you can count more, but the price rarely moves up to R3).
Below the Pivot line, you can find support lines called S1, S2, S3.
Below, you can see a 4-hour chart of Eur/Jpy with the daily Pivot points:
The logic behind this tool is that the price will rise, but eventually, at some point, it will be oversold and it will be very hard for the buyers to force the resistance line. The R1, R2, R3 lines are calculated on the basis of the previous bars and help you determine where the resistance and overbought area might be. When the price is overbought, there is a strong chance that a correction may occur. Then it may take the price down to the Pivot line – that is, to the middle. If the move is strong, it may take the price even lower to the support levels S1 or S2.
On numerous occasions, this tool may be very accurate, so it is good to have it on the chart from time to time.
The most important levels to watch are the S2 and R2. At S2 many sellers close trades and buyers try to buy there. There is a chance for a strong bounce from the S2 level.
At R2 many traders close transactions and open short positions. A strong sell-off is possible at that level.
A monthly, weekly or daily Pivot?
There is one more important thing you should know. There are different Pivot point types. We can draw monthly Pivot points, weekly Pivot points, daily Pivot points, and even 4-hour or more frequent ones. It is all because they are counted on the previous bar, so you may have the previous bar of the month with its high, low, close and count Pivot points for this month.
So as not to confuse you, I will suggest which Pivot points you should use. It all depends on the time frames you trade most.
You mainly trade on very low time frames: 1-min, 5-min…30-min…1-hour – you should have daily Pivot points on your chart. Weekly points are optional – if you want, you can have them too, but it is not necessary.
You trade on medium time frames: 4-hour or daily ones – you should be aware where the weekly and monthly Pivot points are. You should check the daily Pivot points only when you are opening a trade (not to open it at the daily R2 line).
You are a long-term trader. You trade on high time frames: daily, weekly or monthly ones. You should mostly have the monthly Pivot Points or even the quarterly ones.
Should you have all these drawn on your chart? No, unless you want to. It is very hard to read a chart when you have so many indicators on it.
When I trade with Fibonacci, I start a day with identifying the kind of trend there is, and then I check where the major resistance and support levels from Pivot points. Sometimes, I make a note and sometimes I just open another chart with the same index, stock or whatever I am trading at the moment. On the first chart I have the levels from Pivot points and on the second one, I only have a few moving averages. When it comes to trading, I can quickly check if this is a good point to enter or exit a trade.
How to use Fibonacci and Pivots together?
Fibonacci and Pivot levels may give you an idea of where the strongest support or resistance may be. This way, you know better when to open and close the trade. I usually look for a convergence of the Fibonacci retracement line and the Pivot support line (S1, S2, S3) when I want to open a long position in an uptrend.
Let’s have another look at the example where I showed you the Pivot points on the Eur/Jpy chart. We can draw the Fibonacci retracement lines. Notice that when we do it, there is a clear convergence of the daily S2 level and the 50% Fibonacci retracement line. If you are looking to enter a long position, it is a great point to do that.
In another example, there is a trend up, and during a correction, I go long. Over time my trade gets profitable, but I have to decide when I should close it. I trade on a 1-hour chart with weekly and monthly Pivot points. I look for the nearest resistance and I see that the nearest one is the weekly R1 line.
As stated before the most important are S2 and R2, but at R1 and S1 you can also expect some reaction, even if only a few hours long. Since I am opening the position for a short period of time, I do now need to check if there will be some reaction.
My extension level 118% is almost exactly in the same place as the weekly R1. Here we have a convergence of the Fibonacci extension line and the Pivot point resistance line. This is a red light for me. Now I know that I should not wait to see if the price goes up to the 138% or even 161.8% extension. I want to protect my profit. Of course, the R1 level is not a brick wall and the price may go through it. In some cases, it will move back and there will be a correction. I do not wait and I close the position at the 118% extension. Later the price moved a little bit higher, but as you can see, it went back, as a result.
I have my profit and I can hunt for another trade. I hope that you can now see why it is a good combination of tools. I still make my entry and exit decisions basing on Fibonacci, but Pivot points help me to decide when this entry and exit should take place. When I see a convergence of Fibonacci and Pivot lines, it is a very important sign for me that this level may be a strong resistance or support. Compare this technique with some trend following systems – how slow and lagging are they in comparison?
It is like the information you heard on the radio that the road you are on is blocked or very icy. You can decide if you want to go back, select other route or just keep driving but try to be very careful.
Another, similar example: this time the price went higher above the weekly R1 resistance. Let’s say you take a long position here and you are now in profit. When should you close the position?
As you know after reading the previous parts of the book, I suggest dividing the position into two or three parts. The first target here would be the 127% extension because in the same area you can see the monthly Pivot. The price continues to rise and there is still part of the position open (let’s say, another half in this case). You decide that the price is moving strong and there is a weekly R2 level ahead. You notice that just below the weekly R2 there is a 161.8% extension of the previous AB swing. At which level should you close it? In that case, the weekly R2 and 161.8% are very close to each other, so it is a good idea to close the position at this point.
Another way is to open the same chart and check the lower time frame. Sometimes the price tends to overshoot some resistance and then go back below. When you see the first signal of the price moving back, you close the second half of the position. In the example above, the price almost touched the weekly R2 (missed it only for 4 pips), but the 161.8% extension was holding the price.
From the beginning, this trade was intended as a short-term trade. Do you wait with opening the position and hope that the price will move up even more? As you remember the R2 levels tends to be a strong resistance. In the example above, it was Thursday when the price reached the weekly R2. Of course, there is a chance that on Friday there will be a continuation of the move up. But what if there is a correction and you still wait with your position open? You are going to lose most of your profit because the corrections are often very strong and fast.
When you follow my advice and you close your position in parts, you protect your profit. If you believe that there is a chance for the move to continue up, just leave 1/3 of your position open and watch how it goes.
Keeping the whole position open under the weekly R2 and 161.8% at the end of the week is not a good decision – you have to trust me on this one.
At the end of this guide, you can find instructions how to install Pivot points in the MetaTrader software. If this is too much information for you on one chart, just open another chart with the same index, stock or currency. Look how Fibonacci and Pivot point lines work great together sometimes. When you spot the convergence, you are much ahead of other traders!
The advanced guide to fibonacci trading - parts:PART 1. INTRODUCTION
Basic information about Fibonacci numbers and why it is good to know how to use them.
PART 2. THE FIBONACCI RETRACEMENT LEVELS
How they are build and how to draw them to find possible leveles during correction.
PART 3. THE FIBONACCI PROJECTIONS
How to predict where is the best place to exit trade - Fibonacci Extension and Expansion will be helpful here.
PART 4. THE FIBONACCI CONVERGENCE
Learn what convergence is and how to spot it.
PART 5. WHEN TO ENTER A TRADE – A SAFE SCENARIO
Here we put knowledge into practice - you will learn a safe way of opening positions.
PART 6. WHEN TO ENTER – A RISKIER SCENARIO
Little bit riskier scenario of opening trades where possible profit is bigger.
PART 7. WHEN TO EXIT A TRADE
Closing trade is very important, but where is the best place? This should help you to find the best place to exit.
PART 8. MY TEMPLATE
Few examples of different templates you can use in Metatrader software.
PART 9. A FEW IMPORTANT THINGS YOU SHOULD KNOW
How to define trend, the importance of the higher time frame and how to trade the news with Fibonacci tools.
PART 10. FIBONACCI AND PIVOT POINTS
How to combine Fibonacci tools and pivot points.
PART 11. MONEY MANAGEMENT
Proper money management is very important - without it you will be loosing money fast.
PART 12. MORE EXAMPLES OF TRADES
More exapmles where we put together knowledge from guide.
13. THE “HOW-TO” ARTICLES
Few helpful articles about installing templates and using Fibonacci tools.