Pivot points are one of the most popular tools used by traders in the forex market. They are used to determine the overall trend of the market and to identify potential entry and exit points. Pivot points are calculated using the high, low, and closing price of the previous trading session. In this article, we will take a closer look at what pivot means in forex.
Pivot points are a type of support and resistance levels that are used by traders to identify potential price movements. The pivot point is the level at which the market is expected to reverse its direction. If the market is trading above the pivot point, it is considered to be in an uptrend, while if it is trading below the pivot point, it is considered to be in a downtrend.
The pivot point is calculated using the following formula:
Pivot Point = (Previous High + Previous Low + Previous Close) / 3
The first support and resistance levels are then calculated using the following formulas:
First Support Level = (2 x Pivot Point) – Previous High
First Resistance Level = (2 x Pivot Point) – Previous Low
The second support and resistance levels are then calculated using the following formulas:
Second Support Level = Pivot Point – (Previous High – Previous Low)
Second Resistance Level = Pivot Point + (Previous High – Previous Low)
Pivot points are usually plotted on a price chart using horizontal lines. The pivot point is marked by a solid line, while the first support and resistance levels are marked by dotted lines. The second support and resistance levels are marked by dashed lines.
Traders use pivot points to identify potential entry and exit points. For example, if the market is trading above the pivot point and the first support level, it is considered to be in an uptrend. Traders may look to enter long positions when the market pulls back to the first support level. Conversely, if the market is trading below the pivot point and the first resistance level, it is considered to be in a downtrend. Traders may look to enter short positions when the market rallies to the first resistance level.
Pivot points are also used to determine the overall trend of the market. If the market is consistently trading above the pivot point, it is considered to be in an overall uptrend. Conversely, if the market is consistently trading below the pivot point, it is considered to be in an overall downtrend.
In addition to pivot points, traders may also use other indicators to confirm potential entry and exit points. For example, a trader may use a moving average to confirm a potential trend reversal. If the market is trading above the pivot point and the moving average, it may be a good time to enter a long position. Conversely, if the market is trading below the pivot point and the moving average, it may be a good time to enter a short position.
In conclusion, pivot points are a popular tool used by traders in the forex market to identify potential entry and exit points. They are calculated using the high, low, and closing price of the previous trading session and are used to determine the overall trend of the market. Traders may also use other indicators to confirm potential entry and exit points.
