Forex trading is a complex and ever-changing market. As a forex trader, you need to have a strategy that will help you make informed decisions about your trades. One such strategy is using pivot points. Pivot points are a popular tool among forex traders as they provide key levels of support and resistance that can be used to predict potential price movements. In this article, we will discuss how to set pivots in forex and how they can be used in your trading strategy.
What are Pivot Points?
Pivot points are a technical analysis tool that is used to identify potential support and resistance levels in the forex market. These levels are determined by calculating the average of the high, low, and close prices of the previous trading day. The pivot point is then used to calculate three levels of support (S1, S2, and S3) and three levels of resistance (R1, R2, and R3).
How to Calculate Pivot Points?
The calculation of pivot points is relatively straightforward. Here is how you can calculate pivot points:
1. Start by identifying the high, low, and close prices of the previous trading day.
2. Calculate the pivot point by adding the high, low, and close prices together and dividing the result by three.
Pivot point = (High + Low + Close) / 3
3. Calculate the first level of support and resistance by multiplying the pivot point by two and subtracting the high and low prices respectively.
First support level (S1) = (2 x Pivot point) – High
First resistance level (R1) = (2 x Pivot point) – Low
4. Calculate the second level of support and resistance by subtracting the difference between the high and low prices from the pivot point and adding it to the first support and resistance levels respectively.
Second support level (S2) = Pivot point – (High – Low)
Second resistance level (R2) = Pivot point + (High – Low)
5. Calculate the third level of support and resistance by adding or subtracting two times the difference between the high and low prices from the pivot point.
Third support level (S3) = Low – 2 x (High – Pivot point)
Third resistance level (R3) = High + 2 x (Pivot point – Low)
How to Use Pivot Points in Forex Trading?
Pivot points are used in forex trading to identify potential support and resistance levels. Traders can use pivot points to determine entry and exit points for their trades. Here are some ways to use pivot points in forex trading:
1. Trading Breakouts: When the price breaks through a resistance level, it is considered a bullish signal. On the other hand, when the price breaks through a support level, it is considered a bearish signal. Traders can use pivot point levels as a guide to identify potential breakout points.
2. Trading Bounces: If the price bounces off a support level, it is considered a bullish signal. Similarly, if the price bounces off a resistance level, it is considered a bearish signal. Traders can use pivot point levels as a guide to identify potential bounce points.
3. Trading Range-bound Markets: If the price is trading within a range, traders can use pivot points to identify potential support and resistance levels. They can then use these levels to place buy and sell orders.
Conclusion
Pivot points are a useful tool for forex traders as they provide key levels of support and resistance that can be used to predict potential price movements. By calculating pivot points, traders can identify potential entry and exit points for their trades. It is important to note that pivot points should not be used in isolation and should be used in conjunction with other technical analysis tools. By using pivot points in your trading strategy, you can make informed decisions about your trades and increase your chances of success in the forex market.
