Pivot points strategy has been around for a long time and is very important for forex traders. Pivot points show us the levels at which the direction of price movement may change. With couple of simple calculations forex traders are able to have a general idea where the price movement is heading to during the day.
How to Calculate Pivot Points
Pivot points are calculated using couple of mathematical formulas and data from the previous day or from the last trading session, which includes high, low and close. The sequence of points resulting from the calculations is important support and resistance levels.
Below is the formula of pivot point calculation:
Pivot point (PvPt) = (High + Low + Close) divided by 3
Once we know the pivot point, it is easy to obtain support and resistance levels by:
First level support and resistance:
First support (Sup1) = (2 multiply by PvPt) – High
First resistance (Res1) = (2 multiply by PvPt) – Low
Second level of support and resistance:
Second support (Sup2) = PvPt – (High – Low)
Second resistance (Res2) = PvPt + (High - Low)
Obviously, your forex broker has thought about the inconvenience of calculating pivot points yourself, and therefore your trading platform performs the calculations automatically and shows it on the chart. All you have to do is to understand the meaning of the pivot points and the use.
How To Use Pivot Points?
First of all, you have to always remember that pivot points are short-term term indicators and therefore are useful only for one day, after which you will have to calculate the whole thing all over again.Once you have pivot points on your hands, you actually have the primary support/resistance level. Meaning that, a major price change is probably going to take place at this level.
Pivot points can predict two things:
- General market trend: in case pivot point price is headed upward, the market is bullish; in case pivot point price is headed downward, the market is bearish.
- Enter and exit levels of the market: As a forex trader you might put a limit order whenever the price goes over the resistance level. On the other hand, you can set stop-loss in case the support level is breached.
Support and resistance levels may be stronger from one another. The strength is calculated by the amount of times the price jumps off the pivot level. The level is considered the strongest whenever the currency pair reaches the pivot level then reverses many times.
What Should You Do?
Whenever the currency pair is reaching up for the top resistance level, you most probably should sell the pair and place a stop right above the resistance level.
Whenever the currency pair is reaching down the lower support lever, you most probably should buy the pair and place a stop right below the support level.
Things To Remember about Forex Pivot Points
Below are some trading tips you might want to memorize:
- When price is at Pivot Point – expect a move back to Resistance Level 1 or Support Level 1.
- When price is at Resistance Level 1 - expect a move to Resistance Level 2 or back to Pivot Point.
- When price is at Support Level 1 – expect a move to Support Level 2 or back to Pivot Point.
- When price is at Resistance Level 2 – expect a move to Resistance Level 3 or back to Resistance Level 1.
- When price is at Support Level 2 – expect a move to Support Level 3 or back to Support 1.
Disappointment With Pivot Points
Pivot points sound like a perfect indicator to predict market trend without a single mistake and make tones of money! Well, the reality isn’t quite so. We have to disappoint you right here and there – pivot points, like many other things in life, don’t work all the time. Sometimes the price just sort of gets stuck around pivot lines which make it extremely difficult to predict what will be the next price movement. In other case, the price doesn’t even reach the pivot line and reverse. And it is also possible to witness how a pivot line is strong support level and you go long, but then the price decides to fall and you freak out and stop… but then, against all odds, the price reverses back your way. The pivot point trading strategy is up to you and it is your responsibility to follow it.