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Pivot Points - Weekly Cycle - Fibonacci Ratios

Pivot points consist of a central pivot level surrounded by three support levels below it and three resistance levels above it. Pivot points were originally used by floor traders on equity and futures exchanges because they provided a quick way for those traders to get a general idea of how the market was moving during the course of the day using only a few simple calculations. However, over time pivot points have also proved exceptionally useful in other markets as well.

One of the reasons that pivot points are now so popular is because they are considered a "leading" (or predictive) indicator rather than a lagging indicator. All that is required to calculate the pivot points for the upcoming (current) trading  week is the previous week's high, low, and close prices. For 24-hour markets like Forex, each broker determines when the trading week closes for their clients; however, Friday at 4:00PM ET or 5:00PM ET is common as a weekly closing day/time. 12:00AM ET on Monday is also a common weekly closing day/time.

The weekly cycle pivot points in this indicator are calculated according to the following formulas:

Pivot Point for Current Weekly Cycle = (High(Previous Weekly Cycle) + Low(Previous Weekly Cycle) + Close(Previous Weekly Cycle)) / 3

With the central pivot point level already calculated, the support and resistance levels are determined by calculating the previous cycle's high/low price range along with several Fibonacci-based percentages of that price range and then adding those % values to (for resistance levels) or subtracting those % values from (for support levels) the central pivot point. The support levels' and resistance levels' formulas are as follows:

Resistance 1 = Pivot Point + ((High(Previous Weekly Cycle) - Low(Previous Weekly Cycle)) * 0.382)
Support 1 = Pivot Point - ((High(Previous Weekly Cycle) - Low(Previous Weekly Cycle)) * 0.382)

Resistance 2 = Pivot Point + ((High(Previous Weekly Cycle) - Low(Previous Weekly Cycle)) * 0.618)
Support 2 = Pivot Point - ((High(Previous Weekly Cycle) - Low(Previous Weekly Cycle)) * 0.618)

Resistance 3 = Pivot Point + ((High(Previous Weekly Cycle) - Low(Previous Weekly Cycle)) * 1.000)
Support 3 = Pivot Point - ((High(Previous Weekly Cycle) - Low(Previous Weekly Cycle)) * 1.000)

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Interpretation

Pivot point levels can be used in many different ways. Here are a few of the most common methods for utilizing them.

Trend Direction Determined by Pivot Point: Combined with other technical analysis techniques such as overbought/oversold oscillators, volatility measurements, etc., the central pivot point may be useful in determining the general trending direction of the market. Trades are only taken in the direction of the trend. Buy trades occur only when the price is above the central pivot point and sell trades occur only when the price is below the central pivot point.

Price Breakouts: When trading price breakouts, a buy signal occurs when the price breaks up through the central pivot point or one of the resistance levels (typically Resistance 1). A sell signal occurs when price breaks down through the central pivot point or one of the support levels (typically Support 1).

Price Reversals: When trading price reversals, a buy signal occurs when the price moves towards a support level, gets very close to it, touches it, or moves only slightly through it, and then reverses and moves back in the opposite direction. A sell signal occurs when the price moves towards a resistance level, gets very close to it, touches it, or moves only slightly through it, and then reverses and moves back in the opposite direction.

Stop loss and/or Limit Profit Values Determined by Support/Resistance Levels: The central pivot point and its support and resistance levels may be potentially helpful in determining suitable stop loss and/or limit profit placements. For example, if trading a long breakout above the Resistance 1 level it may be reasonable to position a stop loss order just below the central pivot point and one or more limit profit(s) orders at the Resistance 2 and/or Resistance 3 levels.

The materials presented on this website are solely for informational purposes and are not intended as investment or trading advice. Suggested reading materials are created by outside parties and do not necessarily reflect the opinions or representations of Capital Market Services LLC. Please refer to our risk disclosure page for more information.