Beginners must-see! How to use the Pivot Indicator
Pivot indicators are well known among traders, but they are a bit understated. Unlike trend lines, they don’t produce clear signals or arrows, and as they are, they cannot be used intuitively as a trading weapon. Many traders currently use pivots as a guideline for profit-taking in day trading or short-term trading. They determine where to take profits or cut losses by using lines like R1 or S1 as references. But that presumes that the day trading method is correct to begin with. Pivot R1 and S1 are merely “location information” that rests on such a premise.
Let’s delve a little deeper into the essence of pivots. The pivot point, in the first place, is derived from the previous day’s market activity and is used to forecast the next day’s price range. Put simply, it is an indicator for predicting how much the market will move and where the center of that movement lies. The center line, i.e., the “Pivot Point,” can be said to be a kind of “place of calm” where supply and demand are balanced, in physical terms a balanced state.
In practice, the market tends to return to this Pivot Point. This is because the supply-demand balance tends to settle near the Pivot Point. If the market diverges from the Pivot Point, that balance is disrupted. The market can continue to move with the imbalance, but eventually it tends to return to this balance and come back to the Pivot Point.
Here is an important point: "when a strong directional move occurs." When the market moves strongly in one direction, the balance between supply and demand can be greatly disrupted. In such cases, the movement back toward the Pivot Point may be temporarily ignored, but the market cannot move in one direction forever. Because there are sellers, there must also be buyers, so at some point balance must be reached. In other words, even if the market is moving in one direction, it will eventually return to the Pivot Point—as if restoring the lost balance.
In our trading community, we view this property of pivots as the “Missed Pivot,” and we use it as one of our anomaly strategies. Anomalies refer to market movements that have a certain regularity or seasonal/time-based characteristics. For example, “the dollar strengthens at the beginning of the month” or “profit-taking increases on Fridays.” However, many anomalies are vague in evidence and lack reliability.
For instance, you may have heard rumors that “Ghibli films are shown on Friday screenings, causing USD/JPY to rise.” The anomalies we value are not such occult notions, but those with rational grounds that actually have a high likelihood of generating profits. Among these, Missed Pivot is particularly reliable and plays an important role in our trading tactics.
Missed Pivot refers to a situation where the market ends the day without touching a Pivot Point it should have reached. Such missed Pivot points are likely to be touched on the next day or in subsequent price action, and by leveraging this, we can outline high-probability trading scenarios.
For example, if a Missed Pivot occurred the previous day, it is reasonable to expect the market to retrace to that point in the following days. Utilizing this as one of our anomaly tactics increases opportunities for profit.
Moreover, our trading strategy includes 13 tactics, including Missed Pivot. We have tactics that cover everything from scalping to day trading, each backed by concrete, rational, physical justifications rather than mere guesses or experience. They are based on clear logic.
Thus, while the Pivot Indicator itself may seem plain and not immediately actionable, understanding its essence and using it properly can make it a powerful weapon. And by employing anomaly tactics like Missed Pivot, we can further improve trading accuracy.