Forex pivot points are an essential tool for traders who are looking to identify key levels of support and resistance in the market. Pivot points provide traders with an indication of where the market is likely to turn and can be used to identify potential trading opportunities. In this article, we will explain how to calculate forex pivot points and how they can be used in trading.
What are Forex Pivot Points?
Forex pivot points are levels of support and resistance that are based on the previous day’s trading range. Pivot points are calculated using the high, low, and closing prices of the previous trading day. There are different types of pivot points, including standard, Fibonacci, and Camarilla, but the most commonly used are the standard pivot points.
Standard Pivot Points
The standard pivot points are calculated using the following formula:
Pivot Point (PP) = (High + Low + Close) / 3
The first level of support and resistance is then calculated using the following formulas:
Support 1 (S1) = (2 x PP) – High
Resistance 1 (R1) = (2 x PP) – Low
The second level of support and resistance is calculated using the following formulas:
Support 2 (S2) = PP – (High – Low)
Resistance 2 (R2) = PP + (High – Low)
The third level of support and resistance is calculated using the following formulas:
Support 3 (S3) = Low – 2 x (High – PP)
Resistance 3 (R3) = High + 2 x (PP – Low)
How to Use Pivot Points in Trading
Pivot points can be used in a variety of ways in trading. Here are some of the most common ways that traders use pivot points:
1. Identifying Key Levels of Support and Resistance
Pivot points are used to identify key levels of support and resistance in the market. These levels can be used to determine where the market is likely to turn, and traders can use this information to enter and exit trades.
2. Trading Breakouts
Traders can use pivot points to trade breakouts. When the market breaks through a key level of support or resistance, it is a signal that the market is likely to continue in that direction. Traders can enter trades in the direction of the breakout and place their stop loss orders below the key level of support or resistance.
3. Trading Bounces
Traders can also use pivot points to trade bounces. When the market reaches a key level of support or resistance, it is a signal that the market is likely to bounce back in the opposite direction. Traders can enter trades in the opposite direction of the initial move and place their stop loss orders above the key level of support or resistance.
Conclusion
Forex pivot points are an essential tool for traders who are looking to identify key levels of support and resistance in the market. Pivot points provide traders with an indication of where the market is likely to turn and can be used to identify potential trading opportunities. Traders can use pivot points in a variety of ways, including identifying key levels of support and resistance, trading breakouts, and trading bounces. By understanding how to calculate forex pivot points and how to use them in trading, traders can improve their trading performance and increase their profitability.
