Pivot points are widely used by forex traders as a technical analysis tool to identify potential support and resistance levels in the market. Trading pivot points in forex involves identifying the key levels and using them to make trading decisions. In this article, we will explain how to trade pivot points in forex.
What are pivot points?
Pivot points are a set of technical indicators used by forex traders to determine potential support and resistance levels in the market. Pivot points are calculated based on the previous day’s high, low, and closing prices. The pivot point is the central point around which the support and resistance levels are calculated. The support and resistance levels are then plotted above and below the pivot point.
The most commonly used pivot points are the daily pivot points, which are calculated based on the previous day’s high, low, and closing prices. However, weekly and monthly pivot points are also used by traders.
How to calculate pivot points?
To calculate pivot points, you need to know the previous day’s high, low, and closing prices. Once you have this information, you can use the following formula to calculate the pivot point:
Pivot point (PP) = (High + Low + Close) / 3
Once you have calculated the pivot point, you can then calculate the support and resistance levels using the following formulas:
First support (S1) = (2 x PP) – High
Second support (S2) = PP – (High – Low)
Third support (S3) = Low – 2(High – PP)
First resistance (R1) = (2 x PP) – Low
Second resistance (R2) = PP + (High – Low)
Third resistance (R3) = High + 2(PP – Low)
How to trade pivot points in forex?
Trading pivot points in forex involves identifying the key support and resistance levels and using them to make trading decisions. Here are some steps to follow when trading pivot points in forex:
Step 1: Identify the pivot point
The first step in trading pivot points in forex is to identify the pivot point. You can do this by calculating the pivot point using the formula above or by using a pivot point indicator on your trading platform.
Step 2: Identify the support and resistance levels
Once you have identified the pivot point, you can then identify the support and resistance levels. The first support and resistance levels are calculated using the formulas above. The second and third support and resistance levels are calculated using similar formulas.
Step 3: Analyze the market
Before making any trading decisions, you need to analyze the market to determine the trend. You can use technical indicators such as moving averages, MACD, or RSI to determine the trend. If the market is in an uptrend, you should look for buying opportunities at the support levels. If the market is in a downtrend, you should look for selling opportunities at the resistance levels.
Step 4: Make trading decisions
Once you have analyzed the market and identified potential trading opportunities, you can then make trading decisions. If the market is in an uptrend, you should look for buying opportunities at the support levels. If the market is in a downtrend, you should look for selling opportunities at the resistance levels.
You can use different trading strategies when trading pivot points in forex. Some traders use the bounce strategy, which involves buying at the support levels and selling at the resistance levels. Other traders use the breakout strategy, which involves buying when the price breaks above the resistance level or selling when the price breaks below the support level.
Conclusion
Pivot points are a popular technical analysis tool used by forex traders to identify potential support and resistance levels in the market. Trading pivot points in forex involves identifying the key levels and using them to make trading decisions. By following the steps outlined in this article, you can trade pivot points in forex with confidence. Remember to always analyze the market and use appropriate risk management strategies when trading pivot points.
