Pivot points are one of the most widely used technical indicators in the forex market. They are used to identify potential support and resistance levels, as well as to determine the overall trend of the market. Pivot points can be calculated using a variety of methods, but the most common is the standard method. In this article, we will explain how to calculate pivot points in forex using the standard method.
The standard method of calculating pivot points involves three levels of support and resistance. These levels are known as the pivot point, the support level, and the resistance level. The pivot point is the level at which the market is likely to reverse its direction. The support level is the level below the pivot point, and the resistance level is the level above the pivot point.
To calculate pivot points using the standard method, you need to have the high, low, and close prices of the previous trading day. Once you have these prices, you can use the following formula to calculate the pivot point:
Pivot Point = (High + Low + Close) / 3
The support and resistance levels can then be calculated using the following formulas:
Support Level 1 = (2 x Pivot Point) – High
Resistance Level 1 = (2 x Pivot Point) – Low
Support Level 2 = Pivot Point – (High – Low)
Resistance Level 2 = Pivot Point + (High – Low)
Let us take an example to understand this better. Suppose the high, low, and close prices of the previous trading day were 1.2000, 1.1900, and 1.1950, respectively. Using the formula mentioned above, we can calculate the pivot point as follows:
Pivot Point = (1.2000 + 1.1900 + 1.1950) / 3 = 1.1950
We can then calculate the support and resistance levels as follows:
Support Level 1 = (2 x 1.1950) – 1.2000 = 1.1900
Resistance Level 1 = (2 x 1.1950) – 1.1900 = 1.2000
Support Level 2 = 1.1950 – (1.2000 – 1.1900) = 1.1850
Resistance Level 2 = 1.1950 + (1.2000 – 1.1900) = 1.2050
Once you have calculated the pivot points, support and resistance levels, you can use them to identify potential trading opportunities in the forex market. For example, if the market is trading above the pivot point, it is considered to be in an uptrend, and traders may look for buying opportunities. Conversely, if the market is trading below the pivot point, it is considered to be in a downtrend, and traders may look for selling opportunities.
In addition to the standard method, there are several other methods of calculating pivot points. These include the Fibonacci method, the Woodie method, and the Camarilla method. Each method uses a different formula to calculate pivot points and support and resistance levels, and traders may choose the method that works best for their trading style.
In conclusion, pivot points are a popular technical indicator used by forex traders to identify potential support and resistance levels and to determine the overall trend of the market. The standard method of calculating pivot points involves three levels of support and resistance, which can be calculated using the high, low, and close prices of the previous trading day. Traders can use pivot points to identify potential trading opportunities in the forex market, and there are several methods available for calculating pivot points, each with its own formula and approach.
