Pivot points are one of the most widely used technical indicators in the forex market. They are used by traders to identify potential support and resistance levels for a currency pair. Pivot points are calculated using the previous day’s high, low, and close prices and can be used to determine where price is likely to go in the current trading session. In this article, we will explain how to use pivot points in forex trading.
What are Pivot Points?
Pivot points are a technical analysis tool used to determine potential support and resistance levels based on the previous day’s high, low, and closing prices. They are calculated using a specific formula and are plotted on a price chart. The pivot point itself is the average of the high, low, and closing prices from the previous day.
Pivot points are used by traders to identify potential levels of support and resistance. When price approaches a pivot point, it is likely to either bounce off the level or break through it. Traders use pivot points to determine where to enter and exit trades and to set stop-loss and take-profit levels.
How to Calculate Pivot Points
To calculate pivot points, you need the high, low, and closing prices from the previous day. The formula is as follows:
Pivot Point = (High + Low + Close) / 3
The first support level (S1) is calculated as follows:
S1 = (2 x Pivot Point) – High
The second support level (S2) is calculated as follows:
S2 = Pivot Point – (High – Low)
The third support level (S3) is calculated as follows:
S3 = Low – 2 x (High – Pivot Point)
The first resistance level (R1) is calculated as follows:
R1 = (2 x Pivot Point) – Low
The second resistance level (R2) is calculated as follows:
R2 = Pivot Point + (High – Low)
The third resistance level (R3) is calculated as follows:
R3 = High + 2 x (Pivot Point – Low)
How to Use Pivot Points in Forex Trading
Pivot points can be used in several ways in forex trading. The most common is to use them as potential support and resistance levels. When price approaches a pivot point, it is likely to either bounce off the level or break through it. Traders can use pivot points to determine where to enter and exit trades and to set stop-loss and take-profit levels.
For example, if price is approaching a pivot point from below and there is no significant resistance level above it, a trader may consider buying the currency pair. They would set their stop-loss just below the pivot point and their take-profit at the next resistance level above the pivot point.
Alternatively, if price is approaching a pivot point from above and there is no significant support level below it, a trader may consider selling the currency pair. They would set their stop-loss just above the pivot point and their take-profit at the next support level below the pivot point.
Pivot points can also be used in conjunction with other technical indicators. For example, if price is approaching a pivot point and there is also a bullish candlestick pattern forming, this may provide additional confirmation of a potential buying opportunity.
Conclusion
Pivot points are a popular technical analysis tool used by forex traders to identify potential support and resistance levels. They are calculated using the previous day’s high, low, and closing prices and can be used to determine where price is likely to go in the current trading session. Pivot points can be used in several ways, including as potential entry and exit points, stop-loss and take-profit levels, and in conjunction with other technical indicators. By understanding how to use pivot points in forex trading, traders can gain an edge in the market and improve their trading performance.
