Pivot points are one of the most popular trading tools used by forex traders to identify potential support and resistance levels in the market. They are calculated using a mathematical formula that takes into account the high, low and close price of the previous trading day. Pivot points are widely used in forex trading because they are easy to understand and can be applied to any time frame or currency pair. In this article, we will explain how to calculate pivot points in forex trading.
What are Pivot Points?
Pivot points are a technical analysis indicator used to identify potential levels of support and resistance in the market. The pivot point itself is the average of the high, low and close prices from the previous trading day. The formula for calculating pivot points is as follows:
Pivot Point = (High + Low + Close) / 3
Once the pivot point is calculated, additional levels of support and resistance are calculated based on the pivot point. These levels are known as support levels (S1, S2, S3) and resistance levels (R1, R2, R3).
How to Calculate Pivot Points?
Pivot points are calculated using the high, low and close prices from the previous trading day. The following steps are used to calculate pivot points:
Step 1: Determine the High, Low and Close Prices
The first step in calculating pivot points is to determine the high, low and close prices from the previous trading day. These prices can be obtained from a forex chart or from a forex trading platform.
Step 2: Calculate the Pivot Point
Once the high, low and close prices have been determined, the pivot point can be calculated using the following formula:
Pivot Point = (High + Low + Close) / 3
Step 3: Calculate the Support Levels
The first level of support (S1) is calculated by multiplying the pivot point by 2 and subtracting the high from the previous trading day. The second level of support (S2) is calculated by subtracting the high from the previous trading day from the pivot point and then subtracting the difference from the low from the previous trading day. The third level of support (S3) is calculated by subtracting the difference between the high and low from the previous trading day from the pivot point and then subtracting the difference from the low from the previous trading day.
S1 = (2 x Pivot Point) – High
S2 = Pivot Point – (High – Low)
S3 = Low – 2(High – Pivot Point)
Step 4: Calculate the Resistance Levels
The first level of resistance (R1) is calculated by multiplying the pivot point by 2 and subtracting the low from the previous trading day. The second level of resistance (R2) is calculated by subtracting the low from the previous trading day from the pivot point and then adding the difference to the high from the previous trading day. The third level of resistance (R3) is calculated by adding the difference between the high and low from the previous trading day to the pivot point.
R1 = (2 x Pivot Point) – Low
R2 = Pivot Point + (High – Low)
R3 = High + 2(Pivot Point – Low)
How to Use Pivot Points in Forex Trading?
Pivot points are used by forex traders to identify potential levels of support and resistance in the market. Traders can use pivot points to determine entry and exit points for trades, as well as to set stop-loss and take-profit levels.
When the price is trading above the pivot point, it is considered bullish and traders may look for long positions. When the price is trading below the pivot point, it is considered bearish and traders may look for short positions. The support levels can be used as potential entry points for long positions, while the resistance levels can be used as potential entry points for short positions.
In conclusion, pivot points are a useful tool for forex traders to identify potential levels of support and resistance in the market. They are easy to calculate and can be applied to any time frame or currency pair. Traders can use pivot points to determine entry and exit points for trades, as well as to set stop-loss and take-profit levels. By understanding how to calculate and use pivot points in forex trading, traders can enhance their trading strategies and improve their overall profitability.
