When traders start their trading journey, they will come across a lot of terms, indicators, and chart patterns. Both professional and novice traders use indicators for conducting a technical analysis. While it is true that every trader is unique and uses different methods to analyze the markets, it’s best to learn about as many methods as you can and pick the ones that best suit your trading style. Pivot Points are widely used technical indicators and we’ll discuss them in more detail.
Pivot Point definition
Pivot Point in Forex trading is a commonly used indicator to determine support and resistance levels. It is mostly used by day traders who want to take advantage of quick price movements. Pivot Points can also be used to determine market turning points using simple math equations.
Why is Pivot Point important for traders?
- Pivot Points can be used to easily find resistance and support levels.
- Pivot Point can be used to find market turning points.
- Calculating a classic Pivot Point only needs three metrics, which makes it super easy to calculate.
- It is useful for short-term traders who are looking to take advantage of price swings.
Thorough Pivot Point explanation
Pivot Point first appeared in the commodity market, where it was used to determine market turning points. Adapted to the Forex markets, Pivot Points are used to determine support and resistance levels, usually by day traders and scalpers. They can also be used to determine Forex market turning points. The indicator uses three metrics: day’s high, low, and closing price.
Pivot Point = (High + Low + Closing) / 3
There are two types of indicators: Leading (gives signal before a trend or reversal occurs) and Lagging (gives signal after a trend is established). Pivot Points are leading indicators.
An obvious downside of using the indicator is that it doesn’t take into account any economic and political news that influence the currency prices. And therefore, it’s best to use the indicator in combination with various other methods. In addition, keep in mind that indicators and charts are less effective when trading smaller than 1 hour time frames due to market noise. Understanding Pivot Points in trading can help traders determine the best entry and exit points and build their strategy around them.
Example of Pivot Point in Forex
Now let’s look at a Pivot Point example and learn how we can calculate it. For example, let’s say that we are day traders who are trading with the USD/JPY currency pairs. Looking at the chart of the previous day, we can see that the market high was 144.65, the low was 143.12, and it closed at 144.45. Now we decide that we want to find the Pivot Point in order to implement it in our trading strategy.
So, following the Pivot Point formula, we should have this on our screen.
(144.65 + 143.12 + 144.45) / 3
This gives us a Pivot Point of 144.07. This then can be implemented in different strategies and used to set support and resistance levels.
What’s more, you don’t need to do manual calculations at all. There are various indicators built around its formula. Pivot Points make price swings much easier to digest and they generally help swing traders predict future prices.
FAQs on Pivot Points in trading
How do I trade with Pivot Points?
Pivot Points are leading indicators which means they are useful for trading trend reversals and new trends. Pivot Points are especially useful for scalpers that take advantage of price swings.
Do Pivot Points work?
Pivot Points are created by simple calculations that every trader can do themselves. There are various trading indicators built around its formula. Pivot Points work for certain traders, mainly intraday and scalpers. But many traders do not see the benefits of using the indicator. It’s best to test the indicator to find out if it can be beneficial for you.