Forex pivot points are one of the most popular tools used by traders to identify potential support and resistance levels in the market. Pivot points are calculated using the previous day’s high, low, and close prices to determine the levels at which the market may change direction. In this article, we will explain how to calculate forex pivot points using Investopedia’s formula.
Before we dive into the formula, let’s understand the basics of pivot points. Pivot points are levels on a chart that act as potential support or resistance levels. These levels are calculated based on the previous day’s high, low, and close prices. Traders use pivot points to identify potential entry and exit points, as well as to set stop loss and take profit levels.
There are different types of pivot points, including standard pivot points, Fibonacci pivot points, and Camarilla pivot points. In this article, we will focus on the standard pivot points.
The formula to calculate forex pivot points is as follows:
Pivot point (P) = (High + Low + Close) / 3
The first step is to calculate the pivot point (P), which is the average of the previous day’s high, low, and close prices. For example, if the previous day’s high was 1.1200, low was 1.1100, and close was 1.1150, the pivot point would be:
P = (1.1200 + 1.1100 + 1.1150) / 3 = 1.1150
Next, we need to calculate the support and resistance levels based on the pivot point. There are three levels of support and resistance that are calculated using the pivot point:
First support level (S1) = (2 x P) – High
Second support level (S2) = P – (High – Low)
Third support level (S3) = Low – 2 x (High – P)
First resistance level (R1) = (2 x P) – Low
Second resistance level (R2) = P + (High – Low)
Third resistance level (R3) = High + 2 x (P – Low)
Let’s calculate the support and resistance levels based on the pivot point we calculated earlier:
S1 = (2 x 1.1150) – 1.1200 = 1.1100
S2 = 1.1150 – (1.1200 – 1.1100) = 1.1050
S3 = 1.1100 – 2 x (1.1200 – 1.1150) = 1.1000
R1 = (2 x 1.1150) – 1.1100 = 1.1200
R2 = 1.1150 + (1.1200 – 1.1100) = 1.1250
R3 = 1.1200 + 2 x (1.1150 – 1.1200) = 1.1300
Now we have calculated the support and resistance levels based on the pivot point. These levels can be used by traders to identify potential entry and exit points, as well as to set stop loss and take profit levels.
It’s important to note that pivot points are only one tool that traders use to analyze the market. Traders should also consider other technical indicators, as well as fundamental analysis, before making trading decisions.
In conclusion, forex pivot points are a popular tool used by traders to identify potential support and resistance levels in the market. Pivot points are calculated based on the previous day’s high, low, and close prices. Investopedia’s formula for calculating forex pivot points is a simple and effective way to determine these levels. By using pivot points, traders can identify potential entry and exit points, as well as set stop loss and take profit levels. However, it’s important to remember that pivot points should only be used as one tool in a trader’s analysis of the market.
