A pivot point is a technical analysis indicator that is used to determine the overall trend of a specific financial market, such as forex. Pivot points are calculated by taking the average of the high, low, and closing prices from the previous trading session. This calculation is used to determine the support and resistance levels for the current trading session.
The concept of pivot points was originally developed by floor traders in the stock market. These traders used pivot points to determine the overall trend of the market and to identify potential trading opportunities. Today, pivot points are widely used in forex trading as well as other financial markets.
There are several different types of pivot points that are commonly used in forex trading. These include the standard pivot point, the Fibonacci pivot point, and the Camarilla pivot point. Each type of pivot point uses a slightly different calculation method, but the basic concept remains the same.
The standard pivot point is calculated by taking the average of the high, low, and closing prices from the previous trading session. This value is then used to determine the support and resistance levels for the current trading session. The first level of support is calculated by subtracting the high price from the pivot point and adding it to the low price. The first level of resistance is calculated by subtracting the low price from the pivot point and adding it to the high price. Additional levels of support and resistance can be calculated by using the same formula with different multiples of the high, low, and pivot point values.
The Fibonacci pivot point is calculated using the same formula as the standard pivot point, but the support and resistance levels are calculated using Fibonacci ratios instead of simple multiples of the high, low, and pivot point values. Fibonacci ratios are based on the Fibonacci sequence, a mathematical sequence in which each number is the sum of the two preceding numbers. The most commonly used Fibonacci ratios in forex trading are 38.2%, 50%, and 61.8%.
The Camarilla pivot point is calculated using a more complex formula that takes into account the previous day’s high, low, and closing prices as well as the opening price for the current trading session. The Camarilla pivot point is designed to provide more accurate support and resistance levels than the standard pivot point or Fibonacci pivot point.
Pivot points can be used in a variety of ways in forex trading. Some traders use pivot points to determine the overall trend of the market and to identify potential trading opportunities. Others use pivot points to set entry and exit points for their trades. Pivot points can also be used in conjunction with other technical indicators, such as moving averages and oscillators, to provide more accurate trading signals.
It is important to note that pivot points are not infallible indicators. Like all technical analysis tools, pivot points are subject to interpretation and can be affected by market volatility and other factors. Traders should use pivot points in conjunction with other technical indicators and fundamental analysis to make informed trading decisions.
In conclusion, pivot points are a useful tool for forex traders who are looking to identify the overall trend of the market and to set entry and exit points for their trades. There are several different types of pivot points that can be used, each with its own calculation method and level of complexity. Pivot points should be used in conjunction with other technical indicators and fundamental analysis to make informed trading decisions.
