In the world of forex trading, pivot points are widely used by traders to identify potential levels of support and resistance in the market. Pivot points are essentially levels at which the market may experience a reversal or a breakout. They are calculated using a mathematical formula that takes into account the high, low, and close prices of the previous trading day. In this article, we will explain how to find pivot points in forex and how to use them in your trading strategies.
Step 1: Determine the Timeframe
The first step in finding pivot points is to determine the timeframe you want to analyze. Pivot points can be calculated for any timeframe, but the most common ones are daily, weekly, and monthly. Daily pivot points are used by day traders, while weekly and monthly pivot points are used by swing traders and long-term traders.
Step 2: Calculate the Pivot Point
The next step is to calculate the pivot point. The formula for calculating the pivot point is as follows:
Pivot Point = (High + Low + Close) / 3
Where:
– High: The highest price of the previous trading day
– Low: The lowest price of the previous trading day
– Close: The closing price of the previous trading day
Once you have calculated the pivot point, you can use it to calculate the support and resistance levels.
Step 3: Calculate the Support and Resistance Levels
The support and resistance levels are calculated using the pivot point as a reference point. There are different methods for calculating the support and resistance levels, but the most common ones are the following:
– First Support and Resistance Levels:
First Support = (2 x Pivot Point) – High
First Resistance = (2 x Pivot Point) – Low
– Second Support and Resistance Levels:
Second Support = Pivot Point – (High – Low)
Second Resistance = Pivot Point + (High – Low)
– Third Support and Resistance Levels:
Third Support = Low – 2 x (High – Pivot Point)
Third Resistance = High + 2 x (Pivot Point – Low)
Note that the second and third support and resistance levels are not always used by traders, as they are considered less reliable than the first ones.
Step 4: Plot the Pivot Points on a Chart
Once you have calculated the pivot point and the support and resistance levels, you can plot them on a chart. You can use any charting software that allows you to plot pivot points, such as MetaTrader 4 or TradingView.
The pivot point is usually plotted as a horizontal line in the middle of the chart, while the support and resistance levels are plotted as lines above and below the pivot point. The first support and resistance levels are usually plotted as dashed lines, while the second and third ones are usually plotted as solid lines.
Step 5: Use Pivot Points in Your Trading Strategies
Now that you have found the pivot point and the support and resistance levels, you can use them in your trading strategies. Pivot points can be used in a variety of ways, such as:
– Identifying potential levels of support and resistance: Traders can use pivot points to identify potential levels of support and resistance in the market. When the price approaches a support or resistance level, traders may look for price action signals to enter or exit trades.
– Setting stop loss and take profit levels: Traders can use pivot points to set stop loss and take profit levels. For example, if a trader enters a long trade at the first support level, they may set their stop loss below the second support level and their take profit at the first resistance level.
– Confirming trend direction: Traders can use pivot points to confirm trend direction. If the price is above the pivot point, it is considered bullish, while if it is below the pivot point, it is considered bearish. Traders may look for price action signals in the direction of the trend.
Conclusion
Pivot points are a useful tool for forex traders, as they can help identify potential levels of support and resistance in the market. By following the steps outlined in this article, you can easily calculate pivot points and use them in your trading strategies. However, it is important to remember that pivot points are not always accurate and should be used in conjunction with other technical indicators and price action analysis.
