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 available support and resistance level 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.
How do we use pivot points in Forex trading style? It uses pretty standard price information, the previous day’s high, low, and close. 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, two lines above the pivot are called R1 and R2. And they act as resistance lines.
The pivot is the central value and is a reference point for future movements. The S1 and S2 support where the S2 is considered more strong support than the S1.
Similarly, R1 and R2 are the resistances, and R2 has a stronger resistance than 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.
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How to Calculate a 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 previous period’s high, low, and close.
Then, the sum is divided by 3. The S1 is calculated by multiplying the pivot value by two and subtracting the high from the total. The R1 is calculated by multiplying the pivot value with two and subtracting the low from the total. The S2 is calculated in two steps: first, by subtracting the high and the low, and then subtracting the total from the pivot value. Finally, the R2 is calculated in step first by subtracting the high from the low and then adding the total to the pivot value.
Now that you know what pivot points are and how their values are calculated, let’s find out how they can be used in trading.
Using Pivot Points Forex
Pivot Points are versatile and can be used in several ways, such as entry and exit points and breakout points. Let’s assume that the price was above the pivot line when you plotted the pivot points and just below the resistance1. It’s likely an indication that the 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, depending on the market situation, you can 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 R2, and your stop-loss would be above the pivot line.
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 in 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 this level.
So you can buy at S2 and exit at S1 or the pivot line. Likewise, if you find the price near the R2, you can sell and anticipate closing the position at R1 or the pivot line.
The stop-loss for long positions would be below the S2, and for the short position, 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 will further go up, so you can plan to take a long position.
Similarly, if the price breaks below the S2, you can consider selling the particular asset. The pivot points are very useful, but getting a second confirmation from another indicator is always advised.
Especially to trade the breakouts. The RSI, Stochastic, and Moving Averages can all assist you in a second confirmation.