Pivot points are a popular and widely used technical analysis tool in the forex market. They are used to identify potential support and resistance levels for the price of a currency pair, and are based on the previous day’s price action. Pivot points are used by traders to help them identify potential entry and exit points for trades, as well as to set stop-loss orders and profit targets.
So, where exactly are pivot points in forex? Pivot points are calculated based on the high, low, and close of the previous trading day. The calculation involves taking the average of the high, low, and close prices, and then using that value to calculate the pivot point. From there, additional support and resistance levels are calculated using a series of formulas.
The most commonly used pivot point formula is the Standard Pivot Point Formula. This formula simply takes the average of the high, low, and close prices from the previous day, and uses that value as the pivot point. The formula looks like this:
Pivot Point = (High + Low + Close) / 3
Once the pivot point is calculated, additional support and resistance levels can be calculated using the following formulas:
First Support Level = (2 x Pivot Point) – High
Second Support Level = Pivot Point – (High – Low)
Third Support Level = Low – 2 x (High – Pivot Point)
First Resistance Level = (2 x Pivot Point) – Low
Second Resistance Level = Pivot Point + (High – Low)
Third Resistance Level = High + 2 x (Pivot Point – Low)
These support and resistance levels can be used by traders to help them identify potential entry and exit points for trades. For example, if the price of a currency pair is approaching a support level, a trader may consider buying the pair, as there is potential for the price to bounce off the support level and continue higher. On the other hand, if the price is approaching a resistance level, a trader may consider selling the pair, as there is potential for the price to fall back down from the resistance level.
Pivot points can also be used to set stop-loss orders and profit targets. For example, if a trader buys a currency pair at a support level, they may set their stop-loss order just below the support level, as a break below the support level could signal a potential trend reversal. Similarly, if a trader sells a currency pair at a resistance level, they may set their stop-loss order just above the resistance level, as a break above the resistance level could signal a potential trend reversal.
In addition to the Standard Pivot Point Formula, there are several other pivot point formulas that traders can use. These include the Fibonacci Pivot Point Formula, the Woodie Pivot Point Formula, and the Camarilla Pivot Point Formula. Each of these formulas uses a slightly different calculation method, and may produce different support and resistance levels.
In conclusion, pivot points are a valuable technical analysis tool for forex traders. They are used to identify potential support and resistance levels for the price of a currency pair, and can be used to help traders identify potential entry and exit points for trades, set stop-loss orders and profit targets. Pivot points are calculated based on the high, low, and close of the previous trading day, and there are several different formulas that traders can use to calculate them.
