The forex market is a dynamic and ever-evolving market, where traders use different strategies to try and predict future price movements. One such strategy is the use of pivot levels, which are key levels that traders use to determine potential price movements. In this article, we’ll explore what pivot levels are, how they’re calculated, and how traders use them to make trading decisions.
What are Pivot Levels in Forex?
Pivot levels are key levels that traders use as a reference point to determine potential support and resistance levels. They are calculated using the previous day’s high, low, and closing price, and are used to predict potential price movements for the current day.
There are different types of pivot levels, but the most widely used are the standard pivot levels. These are:
– Pivot Point (PP): The central pivot level, which is calculated as the average of the previous day’s high, low, and closing price.
– Resistance 1 (R1) and Support 1 (S1): The first level of resistance and support, which are calculated as follows:
R1 = (2 x PP) – Low
S1 = (2 x PP) – High
– Resistance 2 (R2) and Support 2 (S2): The second level of resistance and support, which are calculated as follows:
R2 = PP + (High – Low)
S2 = PP – (High – Low)
– Resistance 3 (R3) and Support 3 (S3): The third level of resistance and support, which are calculated as follows:
R3 = High + 2 x (PP – Low)
S3 = Low – 2 x (High – PP)
How are Pivot Levels Calculated?
To calculate pivot levels, traders need to use the high, low, and closing prices of the previous trading day. These prices are used to calculate the central pivot point (PP), which is the average of the high, low, and closing prices. Once the PP is calculated, the other pivot levels can be calculated using the formulas mentioned above.
For example, let’s say the high, low, and closing prices for the previous day were as follows:
– High: 1.2000
– Low: 1.1900
– Closing price: 1.1950
To calculate the pivot levels for the current day, we would first calculate the central pivot point (PP) as follows:
PP = (1.2000 + 1.1900 + 1.1950) / 3 = 1.1950
Once we have the PP, we can calculate the other pivot levels as follows:
– R1 = (2 x 1.1950) – 1.1900 = 1.2000
– R2 = 1.1950 + (1.2000 – 1.1900) = 1.2050
– R3 = 1.2000 + 2 x (1.1950 – 1.1900) = 1.2100
– S1 = (2 x 1.1950) – 1.2000 = 1.1900
– S2 = 1.1950 – (1.2000 – 1.1900) = 1.1850
– S3 = 1.1900 – 2 x (1.1950 – 1.1900) = 1.1800
How do Traders Use Pivot Levels?
Traders use pivot levels to determine potential support and resistance levels for the current trading day. If the price is above the central pivot point (PP), traders may consider it a bullish signal, and look for buying opportunities. Conversely, if the price is below the PP, traders may consider it a bearish signal, and look for selling opportunities.
Traders also pay attention to the other pivot levels, such as R1 and S1, as these levels can act as potential support and resistance levels. If the price breaks above R1, traders may consider it a bullish signal and look for buying opportunities. Conversely, if the price breaks below S1, traders may consider it a bearish signal and look for selling opportunities.
Traders can also use pivot levels in conjunction with other technical indicators, such as moving averages and trend lines, to confirm potential trading opportunities.
Conclusion
Pivot levels are key levels that traders use to determine potential support and resistance levels for the current trading day. They are calculated using the previous day’s high, low, and closing prices, and are used to predict potential price movements. Traders pay attention to the central pivot point (PP) as well as the other pivot levels, such as R1 and S1, to make trading decisions. Pivot levels can be used in conjunction with other technical indicators to confirm potential trading opportunities.
