Introduction
Forex pivot points are widely used by traders to identify potential levels of support and resistance in the market. They are calculated based on the previous day’s high, low, and close prices. In this article, we will explore what forex pivot points are and how they work.
1. What are Forex Pivot Points?
Forex pivot points are price levels that are used by traders to determine potential areas of support and resistance. They act as reference points for traders to gauge market sentiment and make trading decisions. Pivot points are calculated using mathematical formulas and are plotted on a price chart.
1.1 Calculation of Pivot Points
The most commonly used formula for calculating pivot points is the standard formula. The formula is as follows:
Pivot Point (PP) = (High + Low + Close) / 3 Support 1 (S1) = (2 * PP) - High Resistance 1 (R1) = (2 * PP) - Low Support 2 (S2) = PP - (High - Low) Resistance 2 (R2) = PP + (High - Low) Support 3 (S3) = Low - 2 * (High - PP) Resistance 3 (R3) = High + 2 * (PP - Low)
2. How Do Forex Pivot Points Work?
Forex pivot points work by providing traders with potential levels of support and resistance. These levels are derived from the previous day’s price action and can help identify areas where the market may reverse or continue its trend.
2.1 Support and Resistance Levels
The main function of forex pivot points is to identify support and resistance levels. Support levels are price levels where buying pressure may outweigh selling pressure, causing the price to potentially bounce back up. Resistance levels, on the other hand, are price levels where selling pressure may outweigh buying pressure, causing the price to potentially reverse and move lower.
2.2 Trading Strategies with Pivot Points
Traders use pivot points in various trading strategies. Some common strategies include:
2.2.1 Pivot Point Bounce
In this strategy, traders look for price to bounce off a pivot point level. If the price approaches a support level, traders may consider buying, expecting the price to bounce back up. Conversely, if the price approaches a resistance level, traders may consider selling, expecting the price to reverse and move lower.
2.2.2 Pivot Point Breakout
This strategy involves waiting for the price to break above a resistance level or below a support level. Traders may enter a trade in the direction of the breakout, expecting the price to continue its momentum in that direction.
2.2.3 Pivot Point Confluence
Traders may also look for confluence between pivot points and other technical indicators or chart patterns. For example, if a pivot point aligns with a trend line or a Fibonacci retracement level, it strengthens the level of support or resistance and may provide a more reliable trading signal.
Conclusion
Forex pivot points are valuable tools for traders to identify potential levels of support and resistance. By calculating pivot points based on the previous day’s price action, traders can gauge market sentiment and make informed trading decisions. Understanding how forex pivot points work and incorporating them into your trading strategy can enhance your analysis and increase the probability of successful trades.