An easy-to-master tool in forex trading, pivot points involve the use of support and resistance levels to provide indications for entry and exit points in the forex trade. These help traders determine how far a market can stretch before it finally rebounds. They also tend to influence price movements, as they are used increasingly by traders.
Tips on Using Pivot Points
Here are some tips for using pivot points:
- Begin by identifying the trend of a given currency pair (whether upward or downward). Traders can do this by looking for patters over several weeks or by trading the pair regularly. For as long as the pivots indicate either a buy order (during upward trend) or sell order (during downward trend), traders can continue trading.
- To calculate pivot points, one must add the last day’s high, low and closing prices and divide by three. Then, you can determine the first level resistance and support values. The first support level is calculated by multiplying the pivot point by tow and then subtracting the high prices; the first level resistance is two times the pivot point minus the low prices. The second level support level is calculated as: pivot point minus the difference of the high and low prices; the second resistance level is pivot point plus the difference of high and low. Most charting software can also do this automatically, well in advance, thus enhancing their use.
- While several time frames can be used for calculating pivots, the longer the time frame used, the longer will be your market stay.
- Traders use pivot points and the support and resistance levels to enter or exit a trade (when trading within the range).
- Using pivots for profitable forex trade depends on traders’ perception of the market condition. If the market is perceived to trade within range, these can be anticipated as areas of reversal. If price trends are perceived to have been established, traders can look for breakouts around pivots.
- With pivot points, traders can predict the following day’s lows and highs in advance. Besides, traders can also get around four to eight resistance and support levels. Identifying a trend is also important, as pivots work best in a trending environment.
However, these should not become the sole basis for conducting forex trade. Traders must also check the signal against other indicators to enhance the chances of successful and profitable forex trading.
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