What are Pivot Points in Forex
Pivot Points help traders identify market reversals. With Pivot Points, traders can predict the support and resistance levels of a currency pair to make entry and exit decisions. In this article, we will discuss Pivot Points in detail and how you can incorporate them in your forex trading strategy.
What are Pivot Points?
A Pivot Point is an intraday technical indicator that is used to identify trends and reversals in the market accurately. It also helps traders see where the currency pair prices could potentially experience support or resistance.
- When the Pivot Point is at the support level, it indicates a bullish market reversal as falling prices stop falling and start rising. Traders can enter a forex position as the market is expected to expand.
- When the Pivot Point is at the resistance level, it indicates a bearish market reversal as increasing prices stop increasing and start falling. Traders can exit a forex position as the market is expected to contract.
How do Pivot Points work?
Each Pivot Point is an average of the closing, high and low price of the currency pair’s exchange rate, and the asset trading above or below it provides traders with the market’s overall sentiment/trend direction.
- When the exchange rate is trending above the Pivot Points, it provides traders with an overall bullish market trend.
- When the exchange rate is trending below the Pivot Points, it provides traders with an overall bearish market trend.
When Pivot Points are closely monitored, they prove to be a successful strategy providing traders with stop-loss, profit target, stop-loss, entry and exit signals.
How to calculate Pivot Points?
The Pivot Point for the current day, also known as the Central Pivot Point, is calculated through the previous day's high, low, and closing price. Central Pivot Point = (Previous day high price + Previous day low price + Previous day closing price)/3 After calculating the Central Pivot Point, one can move ahead to calculate the support and resistance levels as under. The first level of support (S1) = (2*Central Pivot Point) – previous day high The first level of resistance (R1) = 2*Central Pivot Point) – previous day low The second level of support (S2) = Central Pivot Point – (R1 – S1) The second level of resistance (R2) = (Central Pivot Point – S1) + R1 The third level of support (S3) = Central Pivot Point – (R2 – S2) The third level of resistance (R3) = (Central Pivot Point – S2) + R2 You can calculate the Pivot Points, and support and resistance levels for any number of days through the same formula. After the calculations, take the average of the two levels to get the ideal entry or exit points. For example, suppose you are trading USD/EUR at 2, and you want to understand where the market can possibly reverse. With the previous day’s closing price being 2, the high price being 2.5 and the low price being 1.5, you calculate the Central Pivot Point to be = (2+2.5+1.5)/3 = 2. Now, the first level of support will come out to be (2*2) – 2.5 = 1.5 and the first level of resistance will be (2*2) – 1.5 = 2.5. The average of the support and resistance levels will come out to be (1.5 + 2.5) / 3 =1.3, which is closer to the support level, signalling that you can enter the market by taking a buy position at this level since the market has a potential to reverse in the bullish direction.
Where to set a Pivot Point?
1. To enter a short trade
- In a bearish market, you can identify the market reversal Pivot Point either at the first, second or third resistance level.
- As the price retraces back below the resistance level, you can short a trade by placing a stop loss order at the last currency pair's high price.
- If you identify the market entry point at the first level of resistance, you can place a take profit order at the second level of resistance.
2. To enter a long trade
- In a bullish market, you can identify the market reversal Pivot Point either at the first, second or third support level.
- As the price retraces upward, above the support level, you can place a long order by fixing the stop loss below the previous currency pair's low price.
- If you identify the market exit point at the first level of support, you can place your take profit order at the second level of support.
Types of Pivot Points
1. Standard Pivot Point
The standard Pivot Point is used by day traders and is calculated the same way as the Central Pivot Point. It is the most basic Pivot Point that enables traders to identify support and resistance levels in the market.
2. Woodie’s Pivot Point
Woodie’s Pivot Point gives more importance to the closing price of the currency pair in the market. It includes up to three levels of support and resistance, and shorter time frames to predict future price movements. It provides traders with a range at which the currency pair price usually trades and signals them to sell when the price is close to the top of the range and buy when it is close to the bottom of the range. Pivot Point (PP) = (Previous day’s high price + Previous day’s low price + 2*Previous day’s closing price) / 4 S1 = (2*PP) - previous high R1 = (2*PP) – previous low S2 = Current PP – (R1-S1) R2 = PP + High – Low S3 = Low – 2*(High – pivot) R3 = High + 2*(Pivot – low)
3. Fibonacci Pivot Point
Fibonacci Pivot Points follow the Fibonacci retracement levels to calculate the support and resistance levels. The Fibonacci retracement level consists of horizontal lines depicting support and resistance in the market. These levels are denoted as a percentage, which shows how much the price has retraced based on a previous move. The first level of resistance and support is based on a 38.2 percent Fibonacci level, the second level of the two is based on 61.8 percent, and the third level is based on 100 percent Fibonacci retracement level. Pivot Point (PP) = (Previous day high + Previous day low + Previous day closing price)/3 S1 = PP – [0.382 * (high – low)] R1 = PP + [0.382 * (high – low)] S2 = PP – [0.618 * (high – low)] R2 = PP + [0.618 * (high – low)] S3 = PP - [1 * (high -low)] R3 = PP + [1 * (high -low)]
4. Camarilla Pivot Point
The Camarilla Pivot Point is an advanced version of Woodie’s Pivot Point. It calculates four levels of support and resistance, which are backed by a different multiplier on each level. The multiplier helps the Camarilla Pivot point be as close to the market’s price direction as possible, providing traders with potential exit and entry points. Pivot Point (PP) = (High price + Low price + Closing price)/3 S1 = Closing – ((High -Low) x 1.0833) R1 = Closing + ((High -Low x 1.0833) S2 = Closing – ((High -Low) x 1.1666) R2 = Closing + ((High -Low) x 1.1666) S3 = Closing – ((High -Low) x 1.2500) R3 = Closing + ((High -Low) x 1.2500 S4 = Closing – ((High-Low) x 1.5000) R4 = Closing + ((High -Low) x 1.5000) Where 1.0833, 1.1666, 1.25, 1.50 are the multipliers for each level.
5. Demark Pivot Point
The Demark Pivot Point is the only one that starts with a completely different base than other pivots and follows a single level of support and resistance. A number or variable X is used to calculate both support and resistance levels that emphasise on the current currency pair price action. The relationship between the closing and opening price is what defines the calculation of this number ‘X’. The conditions are as follows – If the closing price = opening price, X = High price + Low price + (2 * Closing price) If the closing price > opening price, X = (2 * High price) + Low price + Closing price If the closing price < opening price, X = High price + (2 * Low price) + Closing price Then, Pivot Point (PP) = X/4 The first level of support = X/2 – High price The first level of resistance = X/2 – Low price
Top Pivot Point trading strategies
1. Breakout Trading Strategy
The Pivot Point Breakout Strategy helps initiate short and long trades based on market breakouts. You can place a short trade if there is a bearish breakout and a long trade if there is a bullish breakout. This strategy is best used in the early hours of trading as such breakouts generally occur in the morning. For example, suppose you are trading USD/EUR on a 5-minute chart. In a bullish market, the first trade will take place when the currency pair breaks above the R1 level. This is where you can place a long order, and stop loss can be placed under the previous low price. You will hold the trade until there is another Pivot Point at R2. Another long order can be placed if the price breaks R2 and continues increasing. If the currency pair price does not increase any further, it sends traders an exit signal where the trade should be closed. In our case, it would be at any point above R2.
2. Bounce Trading Strategy
In the Pivot Point Bounce Trading Strategy, shorter time frames are used for trading currency pair prices moving in the market’s direction and bouncing to the opposite direction thereafter. If the currency pair price bounces upwards, beyond the resistance level, it signals traders to place a buy order. On the other hand, if the currency pair price bounces downward, below the support level, it signals traders to place a sell order.
- Traders can place the stop loss order above the pivot point during a short trade.
- Traders can place the stop loss order below the point during a long trade.
For example, suppose a trader is trading USD/EUR, and its prices immediately cross the second level of resistance as the market opens, more traders will enter the market to profit from the rising prices. This will decrease the supply of the currency pair, which will result in the currency pair prices bouncing from the R2 level. This will give the trader a long signal. As more and more traders buy the currency pair, a bullish trend will occur, and currency pair prices will touch the R3 level. At this particular point, the trader will close the trade as the prices will continue to bounce once again, in the downward direction, where the trader can then enter a short position.
3. Moving Average Convergence Divergence (MACD) Trading Strategy
The Pivot Point MACD Trading Strategy combines the Pivot Points with the MACD crossovers to enable traders to enter the market in its current direction. When the MACD line crosses the Pivot Points from below, it signals a downtrend. Soon after, the price breaks below the Pivot Point level, causing another bearish signal and indicating traders to exit the market. In this situation, traders can also short the trade by placing stop loss orders above the R1 level. However, if the currency pair price bounces above the Pivot Point after the crossover, it sends a long opportunity to the traders. In this situation, the stop loss can be placed right below S1.
4. Candlesticks Strategy
The Pivot Point Candlestick Strategy provides traders with precise levels to short or long a trade during a continued trend. If the currency pair price breaks above the main Pivot Point level, signalling an uptrend, you can enter a long trade at the R1 level and wait for the price to break out beyond the R2 level. On the other hand, if the currency pair prices trade around the support level, you can enter a short trade at this point by placing the stop loss order just a little above the S1 level. In this strategy, you can also use a trailing stop order, where the stop price is not specified. The stop price is only defined as an amount or percentage, below or above the prevailing market price. You can place this order at S3 as a Pivot Point some percentage below the current currency pair price.
5. Camarilla Range Strategy
The Camarilla Pivot Point Range Strategy is an advanced version of the classical Pivot Point strategy wherein the overall market trend is determined over multiple timeframes in the forex market. Four different resistance and support levels are used in this strategy to identify key price levels. Since the Camarilla Range strategy focuses on a particular price range in the market between the resistance and support lines, it helps traders identify key reversal signals based on the daily range. When the currency pair price approaches the resistance level, the strategy provides traders with price levels to short the trade due to an expected downtrend reversal. When the prices approach the support level, traders receive price signals to long a trade due to an expected uptrend reversal. The short or long position is taken at one of the four resistance or support elves, based on the level at which the currency pair price is approaching one of the two extremes of the range. Camarilla Pivot Point Calculator Here is how each resistance and support level of the Camarilla Pivot Points can be calculated – Pivot Point = (High price + Low price + Closing price)/3 Resistance 1 = Closing price + ((high price – low price) *1.0833) Resistance 2 = Closing price + ((high price – low price) *1.1666) Resistance 3 = Closing price + ((high price – low price) *1.2500) Resistance 4 = Closing price + ((high price – low price) *1.5000) Support 1 = Closing price – ((high price – low price) * 1.0833) Support 2 = Closing price – ((high price – low price) * 1.1666) Support 3 = Closing price – ((high price – low price) * 1.2500) Support 4 = Closing price – ((high price – low price) * 1.5000)
6. Pivot Point Intraday Trading Strategy
In the Pivot Point Intraday Trading Strategy, intraday traders receive ideal signals to buy or sell trade at the right time during the day. When the market opens above the basic Pivot Point level, it indicates that the market is expected to follow a bullish trend and provides traders with price levels to long the trade. On the other hand, when the market opens below the basic Pivot Point level, it indicates that the market is expected to follow a bearish trend and provides traders with price levels to short the trade.
- The ideal level to buy trade with this strategy is when the currency pair price follows a bearish trend and moves beyond the first resistance level.
- The ideal level to sell trade with this strategy is when the currency pair price follows a bullish trend and moves below the first support level.
Pivot Point vs Fibonacci Retracements: What’s the difference?
Both Pivot Points and Fibonacci Retracements help traders identify a market trend between the resistance and support price levels. A Pivot Point draws price lines between four resistance and support levels, whereas Fibonacci Retracements draw price lines between any two significant price levels in the market like high price and low price, opening price and closing price. Fibonacci Retracement levels are created by connecting several price points between the range, and once the trader chooses a particular level, they want to consider to long or short a trade, they draw lines at specific percentages of the range they select. In contrast, Pivot Points never use percentages to long or short a trade and rather set fixed numbers like closing price, opening price, high price and low price of the day to enable traders to place orders accordingly.
How to trade Pivot Points
Pivot Points can be applied to any currency pair’s price chart as it considers the high, closing, and low prices in a particular time frame. In most cases, they are applied to daily charts to get ideal entry and exit points for the day. Pivot Points identify the currency pair price’s movements and whether the current trend will continue or pivot/reverse. If the currency pair prices approach the support or resistance levels, it indicates that the markets can pivot. If the currency pair trades between the support and resistance range, it indicates that the market will continue in the same direction.
- When there is a bearish breakout in the Pivot Points trading strategy, traders can open a short position to profit from the falling markets as a downtrend is expected.
- When there is a bullish breakout in the Pivot Points trading strategy, trades can open a long position to profit from the rising markets as an uptrend is expected.
Use Pivot Points to identify multiple support and resistance levels
Pivot Points are one of the strongest identifiers of multiple support and resistance levels in the market. Place your first trade on Blueberry Markets, a leading forex trading platform in Australia that can help you experience seamless forex trading like never before. Sign up for a live trading account or try a risk-free demo account.
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