Forex Trading Pivot Points
Pivot points is a set of indicators developed by floor traders in the commodities markets to determine potential turning points, also known as "pivots". These points are calculated to determine levels in which the sentiment of the currency trend could change from "bullish" to "bearish." Currency traders use these points as markers of support and resistance.
These points are calculated as the average of the high, low and close from the previous session:
Forex Pivot Point = (High + Low + Close) / 3
Day traders use the calculated pivot points to determine levels of entry, stops and profit taking, by trying to determine where the majority of other currency traders may be doing the same.
A pivot point is a price level of significance in technical analysis of a financial market that is used by traders as a predictive indicator of price movement. It is calculated as an average of significant prices (high, low and close) from the performance of a market in the prior trading period. If the prices in the following period trades above the central point it is usually evaluated as a bullish sentiment, whereas if price below the central point is seen as bearish.
The central point is used to calculate additional levels of support and resistance, below and above central point, respectively, by either subtracting or adding price differentials calculated from previous trading ranges.
A pivot point and the associated support and resistance levels are often turning points for the direction of price movement in a market.
- In an up trend, the pivot point and the resistance levels may represent a ceiling level for the price. if price goes above this level the uptrend is no longer sustainable and a trend reversal may occur.
- In a down trend , a pivot point and the support levels may represent a low for price level or a resistance to further decline.
The central pivot point can then be used to calculate the support and resistance levels as follows:
Pivot points consist of a central point level surrounded by three support levels below it and three resistance levels above it. These points were originally used by floor traders on equity and futures exchanges because they provided a quick way for those traders to get a general idea of how the market was moving during the course of the day using only a few simple calculations. However, over time they have also proved exceptionally useful in other markets as well.
One of the reasons they are now so popular is because they are considered a "leading" (or predictive) indicator rather than a lagging indicator. All that is required to calculate the pivot points for the upcoming (current) day is the previous day high, low, and close prices. The 24-hour cycle pivot points in this indicator are calculated according to the following formulas:
The central pivot can then be used to calculate the support and resistance levels as follows:
Pivot Points Support and Resistance Levels
Pivot Points as a Forex Trading tool
The pivot point itself represents a level of highest resistance or support, depending on the overall sentiment. If the market is direction-less ( range bound ) prices will often fluctuate greatly around this level until a price breakout develops. Prices above or below the central point indicates the overall sentiment as bullish or bearish respectively. This indicator is a leading Forex indicator that provides signals of potentially new highs or lows within a given chart time frame.
The support and resistance levels calculated from the central point and the previous market width may be used as exit points of the open Forex trades, but are rarely used as entry signals. For example, if the price is up-trending and breaks through the pivot point, the first or second resistance level is often a good target to close a position, as the probability of resistance and reversal increases greatly, with every resistance level.
In pivot point analysis three levels are commonly recognized above and below the central point. These are calculated from the range of price movement in the previous trading period and then added to the central point for resistances and subtracted from it for support levels.
Technical Analysis of Pivot Points
Pivot levels can be used in many different ways. Here are a few of the most common methods for utilizing them:
Trend Direction: Combined with other Forex analysis techniques such as overbought/oversold oscillators, volatility measurements, etc., the central point may be useful in determining the general trending direction of the currency market. Trades are only taken in the direction of the Forex trend. Buy trades occur only when the price is above the central point and sell trades occur only when the price is below the central pivot.
Price Breakouts: In price breakouts, a bullish buy signal occurs when the price breaks up through the central point or one of the resistance levels (typically Resistance 1). A short sell signal occurs when price breaks down through the central point or one of the support levels (typically Support 1).
Trend Reversals: In trend reversals, a buy signal occurs when the price moves towards a support level, gets very close to it, touches it, or moves only slightly through it, and then reverses and starts moving in the other direction.