In the world of forex trading, there are various technical analysis tools that traders use to make informed decisions. One of these tools is the pivot point. Pivot points are important levels that are used to help traders identify potential price movements and make trading decisions based on those movements.
What are pivot points?
Pivot points are technical analysis indicators that are used to determine potential levels of support and resistance in the market. The pivot point is a level at which the price of an asset is expected to move higher or lower. Pivot points are calculated based on the high, low and closing prices of the previous day’s trading session.
There are different types of pivot points, but the most common are the standard pivot points. These are calculated by taking the average of the high, low, and closing prices of the previous day’s trading session. The calculation of pivot points is quite simple, and it can be done manually or with the help of a pivot point calculator.
How to use pivot points in forex
Pivot points are used in forex trading to help traders identify potential levels of support and resistance in the market. Traders use pivot points to determine the direction of the market and to make trading decisions based on those predictions.
Step 1: Calculate the pivot point
To use pivot points in forex, traders need to first calculate the pivot point. As mentioned earlier, the pivot point is calculated by taking the average of the high, low, and closing prices of the previous day’s trading session.
For example, if the high, low, and closing prices of the previous day’s trading session were 1.2000, 1.1900, and 1.1950 respectively, the pivot point would be calculated as follows:
Pivot Point = (High + Low + Close) / 3
Pivot Point = (1.2000 + 1.1900 + 1.1950) / 3
Pivot Point = 1.1950
Step 2: Calculate the support and resistance levels
Once the pivot point has been calculated, traders can then use it to determine the potential levels of support and resistance in the market. Support and resistance levels are important because they help traders identify potential price movements.
There are three main levels of support and resistance that traders can calculate using pivot points. These are the first support level (S1), first resistance level (R1), second support level (S2), and second resistance level (R2).
The first support and resistance levels are calculated as follows:
First Support Level (S1) = (2 x Pivot Point) – High
First Resistance Level (R1) = (2 x Pivot Point) – Low
Using the example above, the first support and resistance levels would be calculated as follows:
S1 = (2 x 1.1950) – 1.2000
S1 = 1.1900
R1 = (2 x 1.1950) – 1.1900
R1 = 1.2000
The second support and resistance levels are calculated as follows:
Second Support Level (S2) = Pivot Point – (High – Low)
Second Resistance Level (R2) = Pivot Point + (High – Low)
Using the example above, the second support and resistance levels would be calculated as follows:
S2 = 1.1950 – (1.2000 – 1.1900)
S2 = 1.1850
R2 = 1.1950 + (1.2000 – 1.1900)
R2 = 1.2050
Step 3: Analyze the market
Once the pivot point, support, and resistance levels have been calculated, traders can then analyze the market to determine potential price movements. Traders can use pivot points to identify potential levels of support and resistance, and make trading decisions based on those levels.
For example, if the price of a currency pair is trading above the pivot point, traders may look to buy the currency pair as it is likely to continue moving higher. On the other hand, if the price of a currency pair is trading below the pivot point, traders may look to sell the currency pair as it is likely to continue moving lower.
Conclusion
Pivot points are important technical analysis tools that traders use to identify potential levels of support and resistance in the market. Pivot points can be calculated manually or with the help of a pivot point calculator. Traders can use pivot points to make trading decisions based on potential price movements in the market. Pivot points are just one of the many tools available to forex traders, and they should be used in conjunction with other technical analysis tools to make informed trading decisions.
