Forex trading is a highly competitive market that requires intricate knowledge of the market and trading techniques. One such technique used by traders to identify potential turning points in the market is called pivot point trading. Pivot points are technical indicators used by traders to predict market trends and identify potential entry and exit points in the market. This article will discuss what pivot points are, how they are calculated, and how they can be used in forex trading.
What are Pivot Points?
Pivot points are a set of technical indicators used by traders to identify potential turning points in the market. They are calculated based on the previous day’s high, low, and closing price. The pivot point itself is the average of the high, low, and closing prices of the previous day. Two support levels and two resistance levels are then calculated based on the pivot point.
The support levels are calculated by subtracting the previous day’s high from the pivot point and multiplying the result by a coefficient. The first support level is then obtained by subtracting the result from the pivot point, and the second support level is obtained by subtracting the result from the first support level.
The resistance levels are calculated by subtracting the pivot point from the previous day’s low and multiplying the result by the same coefficient used in calculating the support levels. The first resistance level is then obtained by adding the result to the pivot point, and the second resistance level is obtained by adding the result to the first resistance level.
How are Pivot Points Calculated?
Pivot points are calculated based on the previous day’s high, low, and closing price. The pivot point itself is the average of the high, low, and closing prices of the previous day. Two support levels and two resistance levels are then calculated based on the pivot point.
The formula for calculating pivot points is as follows:
Pivot Point = (High + Low + Close) / 3
The first support level is calculated as follows:
Support 1 = (2 x Pivot Point) – High
The second support level is calculated as follows:
Support 2 = Pivot Point – (High – Low)
The first resistance level is calculated as follows:
Resistance 1 = (2 x Pivot Point) – Low
The second resistance level is calculated as follows:
Resistance 2 = Pivot Point + (High – Low)
How are Pivot Points Used in Forex Trading?
Pivot points are used by traders to identify potential turning points in the market. When the market is above the pivot point, it is considered bullish, and when the market is below the pivot point, it is considered bearish. Traders can use pivot points to identify potential entry and exit points in the market.
One common strategy used by traders is to buy when the market is above the pivot point and sell when the market is below the pivot point. Traders can also use the support and resistance levels as potential entry and exit points. For example, a trader may buy when the market reaches the first support level and sell when the market reaches the first resistance level.
Another strategy used by traders is to use pivot points in conjunction with other technical indicators, such as moving averages or RSI. Traders may use pivot points to confirm signals from other indicators or to identify potential trend reversals.
Conclusion
Pivot points are a set of technical indicators used by traders to identify potential turning points in the market. They are calculated based on the previous day’s high, low, and closing price and are used to identify potential entry and exit points in the market. Pivot points can be used in conjunction with other technical indicators to confirm signals or identify potential trend reversals. Understanding pivot points is an essential part of forex trading and can help traders make informed decisions in the market.
