Pivoting is a technical analysis tool that traders use to identify potential levels of support and resistance in the forex market. A pivot point is a price level that is calculated by taking the average of a previous day’s high, low, and closing price. This article will explain in-depth what a pivot point is, how it is calculated, and how traders use it to make trading decisions.
What is a Pivot Point?
A pivot point is a price level that is calculated by taking the average of a previous day’s high, low, and closing price. The pivot point is then used as a reference point for identifying potential levels of support and resistance in the market. There are three main pivot points: the pivot point, support levels, and resistance levels.
The pivot point is the central point around which the other levels revolve. It is the most important level and is used as a reference point for the other levels. The pivot point is calculated as follows:
Pivot Point = (High + Low + Close) / 3
The support levels are levels below the pivot point that are expected to provide support to the market. These levels are calculated as follows:
First Support Level = (2 x Pivot Point) – High
Second Support Level = Pivot Point – (High – Low)
The resistance levels are levels above the pivot point that are expected to provide resistance to the market. These levels are calculated as follows:
First Resistance Level = (2 x Pivot Point) – Low
Second Resistance Level = Pivot Point + (High – Low)
How is a Pivot Point Calculated?
The pivot point is calculated by taking the average of a previous day’s high, low, and closing price. This is done to determine the central point around which the other levels will revolve. The pivot point is then used as a reference point for identifying potential levels of support and resistance in the market.
The support and resistance levels are calculated using the pivot point as a reference point. The first support level is calculated by subtracting the previous day’s high from twice the pivot point. The second support level is calculated by subtracting the previous day’s high from the pivot point and then subtracting the difference between the previous day’s high and low.
The first resistance level is calculated by subtracting the previous day’s low from twice the pivot point. The second resistance level is calculated by adding the difference between the previous day’s high and low to the pivot point.
How Do Traders Use Pivot Points?
Traders use pivot points to identify potential levels of support and resistance in the market. These levels can be used to make trading decisions, such as entering or exiting a trade. Traders may use pivot points in conjunction with other technical indicators, such as moving averages or trend lines, to confirm trading signals.
When the market is trading above the pivot point, traders may consider the market to be bullish and look for opportunities to buy. When the market is trading below the pivot point, traders may consider the market to be bearish and look for opportunities to sell.
Traders may also use the support and resistance levels to determine potential entry and exit points for trades. For example, if the market is trading close to a support level, a trader may consider buying with a stop loss below the support level. If the market is trading close to a resistance level, a trader may consider selling with a stop loss above the resistance level.
Conclusion
In conclusion, pivot points are a technical analysis tool that traders use to identify potential levels of support and resistance in the forex market. A pivot point is a price level that is calculated by taking the average of a previous day’s high, low, and closing price. Traders use pivot points to make trading decisions, such as entering or exiting a trade. Pivot points can be used in conjunction with other technical indicators to confirm trading signals.
