What is a Pivot Point in Forex Trading?

A pivot point in Forex Trading is an important price level for those who are trading using technical analysis. Pivots are may help traders determining the optimal entry/exit levels. In general, when a Forex currency pair trades above the pivot point it is considered a bullish pair, while when a Forex currency trades below the pivot point it is considered bearish.

Calculating the Forex Pivot Points

You may calculate the pivot point of a currency pair easily by using the high, the low, and the closing price of this pair during a specific time period. Usually, that period is a trading day.

1) The simplest formula to calculate the pivot point is:

Pivot = (High + Low + Close) / 3

2) The pivot point may also include the opening prices of a specific period and thus be calculated by:

Pivot = (High + Low + Close + Open) / 4

3) Additionally you may add weights on each factor, for example:

Pivot = {High + Low + (2*Close) + Open} / 5

**Usually Pivots are calculated within a Daily Chart.

Which Types of Traders are using the Pivot Points?

Pivots are popular to all styles of Forex Traders:

1) Trend Traders use pivots to optimize their entry levels.

2) Breakout Traders use a pivot breaking as a strong sign of a trend breakout.

3) Range-Bound Forex Traders who are using a pivot point to trade Forex at times when the activity of a currency pair is weak and usually trades between a pivot and a support or resistance level.

4) Forex Beginners are using a daily pivot point and a support or resistance level to trade Forex easily.

How to Trade using Forex Pivots?

If a currency is at the beginning of a period when a pivot is reached then trading that currency may prove profitable.

For example, let’s assume EUR/USD is trading at 1.2840 and suddenly is falling to 1.2800 which is a pivot point. If EUR/USD shows signs of an uptrend reaction then you buy it. As the pivot point is reached and not broken. If the volume activity increases considerably then the reaction can be seen as a more reliable one.

Calculating Support & Resistance using Pivots

After the pivot point is determined Support & Resistance levels may be calculated as follows:

First Support & Resistance Levels

1st Resistance = (2*Pivot) – Period Low

1st Support = (2*Pivot) – Period High

Second Support & Resistance Levels

2nd Resistance = Pivot + (Resistance1-Support1)

2nd Support = Pivot - (Resistance1-Support1)

Third Support & Resistance Levels

Keep in mind that they are considered weak in comparison to 1st and 2nd Points.

3rd Resistance = Pivot + (Resistance2-Support2)

3rd Support = Pivot - (Resistance2-Support2)

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