Pivot points are technical indicators or tools used in forex trading and signify a change in market sentiment. This level reflects the sentiments of the forex market when it changes from bullish to bearish and vice versa. This technical analysis is used to determine the total trend of the forex market at different points in time. The term pivot is simply the difference between the high, low and closing prices encountered in past trading days.
A Pivot point is seen as an essential technical analysis tool used for trading futures, commodities, and stocks. When compared to other technical indicators, pivot points are static and stays at the exact prices throughout a trading day. Five pivot points are generated based on the previous day’s trading.
When trading forex, trading above the pivot point indicates the ongoing bullish sentiments of the forex market while trading below the pivot point indicates ongoing bearish sentiments in the forex market. Pivot points when used with other technical indicators are determinant of resistance and support levels. Consequently, forex traders use the support and resistance levels to make accurate decisions on when to enter and exit trade positions. The tool can be also considered as a notification to take profit and stop loss actions.
CALCULATING PIVOT POINTS
They exit several methods used for the calculation of pivot points. The most common of them all is the five-point system. This system of calculation makes use of the past (previous) day high, low and closing prices in conjunction with two support and resistance levels. A pivot point has the following equation.
Pivot point = previous day high price + previous day low price + previous day close price/3.
Support level 1 = (pivot point x 2) – previous day high price.
Support level 2 = pivot point – (previous day high price – previous day low price).
Resistant level 1 = (pivot point x 2) – previous day low price.
Resistant level 2 = pivot point + (previous day high price – previous day low price).
HOW TO USE PIVOT POINTS
In a price action analysis chart, if a financial asset, trading instruments or security is trading higher than the pivot point, it is considered a support level. When a pivot point is at a higher price in relative to a financial asset, it is called a price resistant level. The prices of a security have greater tendencies to pause or rebound when a pivot is tested for the first time. As pivot points are used to determine support and resistance levels by calculation, support and resistance level are also used to identify breakout trading opportunities. In reference to the bullish and bearish nature of the market, a resistance is met when bull trading increases to a consistent level before retracing and a support is met when bear trading decreases to a low point before surging up again.
In conclusion, forex traders are in search of prices that will aid them break through identified support and resistance levels based on new trends in other to make fast profits and returns. This trading strategy is made possible using a pivot point.