Pivot points in for Forex are a leading indicator. Which means it has forward-looking abilities. The most basic explanation of pivot points is that it's used to show the support and resistance level that are available in the market. Learning different aspects of Forex trading will make you a better trader. Therefore, pick the trading style that makes you the most successful and run with it.
What Are Pivot Points Forex Trading Style?
- How do we use pivot points Forex trading style? It uses pretty standard price information which is the previous day's high, low and close. And then it constructs a central pivot on the chart with support and resistance levels plotted away from the central pivot. Usually, there are two lines below the pivot which are called S1 and S2. They act as support lines. Likewise, there are two lines above the pivot which are called R1 and R2. And they act as resistance lines.
1. What Are the Pivot Points Central Value?
The pivot is the central value and is used as a reference point for future movements. The S1 and S2 support where the S2 is considered more strong support than the S1.
Similarly, the R1 and R2 are the resistances and R2 is stronger resistance than the R1. Some trading platforms can also plot 3 or 4 resistance and support lines. Note that the levels in the moving average change as the market moves. However, the pivot points Forex levels are static and don't change until the next period.
Whether you're trading Futures points vs ticks or Forex, you can use pivot points. As a result, they work in any trading style. Therefore, pivot points Forex translates to options and/or stocks.
2. How to Calculate Pivot Point
The pivot points Forex are calculated using several methods. However, we'll discuss the most commonly used calculation method. The central pivot is calculated by adding the high, low, and close of the previous period.
Then the sum is divided by 3. The S1 is calculated by multiplying the pivot value with two and then the high is subtracted from the total. The R1 is calculated by multiplying the pivot value with 2 and then the low is subtracted from the total. The S2 is calculated in two steps first by subtracting high and the low and then the total is subtracted from the pivot value. Finally, the R2 is also calculated in step first by subtracting the high from the low and then the total is added to the pivot value.
Now that you know what are the pivot points and how their values are calculated let’s find out how they can be used in trading.
3. Using Pivot Points Forex
Pivot Points are versatile and are used in several ways, they can be used for entry and exit points as well as breakout points. Let’s assume that when you plotted the pivot points the price was above the pivot line and just below the resistance1. It's likely an indication that price would further go up and you can buy. Now, the take profit for this position would be either at R1 or since we know the R1 is a weaker resistance than the R2, so depending on the market situation you can even keep your take profit just before the R2. The stop-loss for this trade would be just below the pivot line.
How Do You Use Pivot Points in Forex?
- To understand how pivot points can assist in a short position let’s assume that the price is keeping below the pivot line indicating a further decline. So what you can do in this scenario is to open a short position while keeping your take profits either at R1 or just above the R2 and your stop-loss would be above the pivot line.
1. Another Way to Trade Them
Another way of trading pivot points is when the price has reached the S2 or R2 levels which you know are the two extreme levels on a particular time frame.
So for instance, if you find the price at S2 you know that it is a strong support level and the price has the potential to reverse from here level.
So you can buy at S2 and exit either at S1 or the pivot line. Likewise, if you find the price near the R2, you can sell and anticipate to close the position either at R1 or the pivot line.
The stop-loss for long positions would be below the S2 and for the short position, it would be above the R2 level.
The pivots can be used to trade the breakouts as well. For example, if the price breaks above the R2, it’s likely an indication that the price would further go up so you can plan to take a long position.
Similarly, if the price breaks below the S2 you can think of selling the particular asset. The pivot points are very useful but it is always advised to take a second confirmation from another indicator.
Especially to trade the breakouts. The RSI, Stochastic, Moving Averages all can assist you in a second confirmation.
Learning how to trade pivot points Forex style can be another great way to become a good Forex trader. So make sure your Forex broker is a good one. And you'll be off the the Forex races.