There are various trading indicators that help traders plan future trades. Pivot Points are mainly used by intraday traders and scalpers.
Forex Pivot Point indicator’s primary usage is to determine the market’s overall trends and reversals. Unlike moving averages and oscillators, Pivot Point is static and does not move around throughout the day.
The indicator is simple to use, as it provides traders with trendlines that serve as support and resistance levels. Let’s dive deep to learn more about Pivot Points.
Pivot Point indicator overview
Pivot Point indicator is a technical indicator used to determine the state of the market and ongoing trends. It uses the highs and lows of the previous trading session to determine the support and resistance levels of the asset. These levels are then used to determine trend direction, and traders can take adequate action according to the information received.
- Indicator Type: Leading indicator
- Best timeframe to use: 1-5 minutes
- Goes best with: MA and Fibonacci
- Placed on: On the chart
Technical details of Pivot Point indicator
Pivot Point is a simple indicator to use. It placed various lines on the chart, and these lines are then used to determine support and resistance levels. The indicator does not work for everyone. Pivot Points is primarily used by scalpers and intraday traders as it produces large amount of trading signals. The indicator can be combined with various strategies and other indicators to increase probability of trade going in the predicted direction. When price gets close to Pivot Point lines, it is a signal that the price might reverse or retrace.
How to calculate Pivot Points
When calculating Pivot Points, they might seem complicated as there are a few calculations we need to make in order to calculate the pivot point and support and resistance levels. But if we take a closer look, it becomes a really easy formula to calculate and implement in your trading activities. Trading platforms automatically display trading signals when applying the indicator. However, it’s important to learn how calculations work to better understand the indicator. When we are calculating Pivot Points, all we need are High and low prices, as well as the closing price of an asset from the previous trading session. Once we have these numbers, we can use the following formula to calculate Pivot Points.
P = (High + Low + Closing) / 3
R1 = (P × 2) – Low
R2 = P + High – Low
S1 = (P × 2) – High
S2 = P – High – Low
We will mention again that these high, low, and closing prices of an asset are taken from the previous trading session and not the current one.
What does Pivot Point tell us?
As we mentioned earlier, the Pivot Point indicator is a static indicator, and chart lines don’t move throughout the day. Traders can plan their trading activities using support and resistance levels provided by Pivot Points. When traders see that the price of an asset falls below the Pivot Point, it signals that it is the best time to sell, while if the price crosses and goes over the pivot point, we have a buy signal. This indicator is mostly used by day traders, who take advantage of early trend price movements. Traders usually combine FX trading Pivot Point indicator with other indicators such as moving averages and Fibonacci retracement.
When placed on the chart, Pivot Points consist of multiple lines. These lines are Pivot Points itself and 2 resistance levels along with 2 support levels. We also need to mention that there is the possibility of a third additional support and resistance level, but in most cases 2 levels are enough if you are not trading with a very specific strategy. When it comes to color visualizations, these lines can be set in any color you see fit, but the most basic combination of colors is green, orange, and red.
Practical application of Pivot Point indicator
When it comes to Pivot Point indicator trading FX pairs, there are multiple ways you can do that. It is an easy-to-use indicator. Beginner traders will have an easy time keeping an eye on the chart as there won’t be a bunch of moving lines all over the chart. Traders can select different strategies that work with Pivot Points, and these strategies can be both complicated for experienced traders and easy to use for beginner traders. Below, we will present you with strategies and Pivot Point indicator examples in Forex.
Pivot Point breakout strategy
Pivot Points provide us with 2 support and resistance levels along with the pivot point itself. This gives us 5 potential significant points, making the breakout strategy one of the best strategies to use with Pivot Points. In this strategy, we are looking for the price to break out from support or resistance levels. If support is broken, traders should consider selling, while if it breaks out from resistance, traders should enter long positions. Below, we will showcase a Pivot point indicator example using this strategy.
In the example, we are trading with EUR/USD currency pairs that have been ranging. The first breakout happened when the price went above the pivot point line. The move produced a buy signal, and we opened a long position. The prices started to go up, and they broke out from the first resistance level as well. This suggests that this is a strong trend, and we keep our position open. Following this, the price went above the second resistance level as well, but it could not keep the trend direction, so prices soon started to go down. This is when we exit the position and realize our profits.
History and other useful details of Pivot Point
One interesting detail of Pivot Point is that it looks similar to the Fibonacci indicator, and to some extent it is true. They both draw horizontal lines that showcase the potential support and resistance levels of an asset. But the Fibonacci retracement indicator uses percentages to draw the line, while the Pivot Point has set values such as high, low, and closing price.
We also mentioned before that Pivot Point can have third additional support and resistance levels, and if you wish to use them, the formula for calculating them are as follows:
R3 = R1 + (High – Low)
S3 = S1 – (High – Low)
Lastly, we want to mention that using just pivot points will not work for most traders. There is always a possibility that even if the price breaks resistance or support, it will not follow the logical trend, and it might go in the complete opposite direction. So, as with almost all indicators, it is best to use Pivot Points as a part of a big trading plan.
FAQs on Pivot Point indicator
Does Pivot Point indicator work in Forex?
Yes, the Pivot Point indicator does work in Forex trading. But it will not work for everyone, and you should only use this indicator if it will go well with your trading strategy.
Is the Pivot Point indicator reliable?
Pivot Point indicator is known to be an accurate Forex indicator, however, using only the Pivot Point indicator might not be the best option. It is generally advised that we use it along with other indicators as a part of our big trading plan.
Is Pivot Point a good indicator?
Yes, Pivot Point is a good indicator that is used across different markets. Along with Forex, traders can utilize Pivot Points in Stocks, Commodities, Crypto, etc.