Pivot points are one of the most popular technical analysis tools used by forex traders. Pivot points are calculated based on the previous day’s high, low and close prices, and are used to identify potential support and resistance levels. Pivot points are also used to determine potential entry and exit points for trades. In this article, we will explain in-depth how to use pivot points in forex trading.
Understanding pivot points
Before we dive into how to use pivot points, it’s important to first understand what they are. Pivot points are levels that are calculated based on the previous day’s price action. There are different types of pivot points, but the most common ones are the standard pivot points, which are calculated based on the previous day’s high, low and close prices.
The formula for calculating pivot points is as follows:
Pivot point (PP) = (High + Low + Close) / 3
The first level of support and resistance is then calculated as follows:
First support level (S1) = (2 x PP) – High
First resistance level (R1) = (2 x PP) – Low
The second level of support and resistance is then calculated as follows:
Second support level (S2) = PP – (High – Low)
Second resistance level (R2) = PP + (High – Low)
The third level of support and resistance is then calculated as follows:
Third support level (S3) = Low – 2(High – PP)
Third resistance level (R3) = High + 2(PP – Low)
Using pivot points in forex trading
Once you have calculated the pivot points, you can use them to identify potential support and resistance levels. If the price is trading above the pivot point, it is considered bullish, and the first level of resistance (R1) becomes the target for traders. If the price breaks through the first level of resistance, it may continue to move up towards the second level of resistance (R2).
On the other hand, if the price is trading below the pivot point, it is considered bearish, and the first level of support (S1) becomes the target for traders. If the price breaks through the first level of support, it may continue to move down towards the second level of support (S2).
Traders can also use pivot points to determine potential entry and exit points for trades. For example, if the price is trading above the pivot point and the first level of resistance (R1) has been broken, traders may look to enter a long position with a stop loss placed below the first level of resistance.
Similarly, if the price is trading below the pivot point and the first level of support (S1) has been broken, traders may look to enter a short position with a stop loss placed above the first level of support.
It’s important to note that pivot points should not be used in isolation, but rather in conjunction with other technical analysis tools. Traders should also keep an eye on key economic events and news releases that may impact the forex market.
Conclusion
Pivot points are a popular technical analysis tool used by forex traders to identify potential support and resistance levels, as well as entry and exit points for trades. Pivot points are calculated based on the previous day’s high, low and close prices, and traders can use them to determine whether the market is bullish or bearish. Traders should use pivot points in conjunction with other technical analysis tools, and should also keep an eye on key economic events and news releases that may impact the forex market.
