Pivot points are an effective way of analyzing market trends and making informed trading decisions. They are widely used by traders to identify potential support and resistance levels, as well as determining entry and exit points for trades. In this article, we will explain what pivot points are and how to use them in forex trading.
What are pivot points?
Pivot points are technical indicators that are calculated based on the high, low, and closing prices of the previous trading day. They are used to predict potential support and resistance levels for the current trading day. The pivot point level is calculated by adding the high, low, and closing prices of the previous day, and then dividing the sum by three. This gives you the pivot point level for the current day.
In addition to the pivot point level, there are two other levels that are calculated based on the pivot point level. These are the support and resistance levels. The support levels are calculated by subtracting the previous day’s high from the pivot point level, and then subtracting that result from the pivot point level again. The resistance levels are calculated by adding the previous day’s low to the pivot point level, and then subtracting that result from the pivot point level again.
How to use pivot points in forex trading?
Pivot points are an effective tool for forex traders to identify potential support and resistance levels, as well as determining entry and exit points for trades. Here are some ways to use pivot points in forex trading:
1. Identify levels of support and resistance
The first step in using pivot points is to identify levels of support and resistance. Support levels are areas where the price is likely to find support and bounce back up, while resistance levels are areas where the price is likely to find resistance and fall back down. Once you have identified these levels, you can use them to enter and exit trades.
2. Use pivot points to identify trends
Pivot points can also be used to identify trends in the market. If the price is trading above the pivot point level, it is considered bullish, while if the price is trading below the pivot point level, it is considered bearish. This can help you determine whether you should be buying or selling.
3. Determine entry and exit points
Once you have identified the levels of support and resistance, you can use them to determine your entry and exit points. If the price is trading near a support level, you can enter a long position with a stop loss below the support level. Similarly, if the price is trading near a resistance level, you can enter a short position with a stop loss above the resistance level.
4. Use pivot points with other indicators
Pivot points can be used in combination with other technical indicators to confirm trading signals. For example, if you see a bullish candlestick pattern near a support level, this can be a strong signal to enter a long position.
Conclusion
Pivot points are a powerful tool for forex traders to identify potential support and resistance levels, as well as determining entry and exit points for trades. They are easy to calculate and can be used in combination with other technical indicators to confirm trading signals. By using pivot points in your trading strategy, you can improve your chances of making profitable trades in the forex market.
