Pivot Points in Forex trading: essentials for understanding
There are many different methods of analysis in the Forex market. Traders use trend strength indicators, oscillators, market volumes, and patterns in order to find a good entry point into the market, get the maximum return and close the position on time. It is difficult to identify entry points and mark support and resistance levels on your own since this process is very subjective. This is where knowledge about Pivot Points comes to the rescue – the same support and resistance levels that are calculated using an exact mathematical algorithm.
The importance of Pivot Points has already been appreciated by a huge number of traders, so everyone who seriously uses Technical analysis in Forex and other financial markets is guided by them in their trading. In this regard, in this article, we will look at the main aspects of Pivot Points and discuss the trading strategies that can be used with them.
What are Pivot Points in Forex trading?
The Pivot Point is the price level at which it is most likely to reverse. Many decades ago, speculators used special formulas to roughly estimate the price range and levels (points) from which the price can rebound.
Pivot points are used by traders to identify areas of potential support and resistance. These are the levels at which the price reacts in a certain way. In addition, Pivot points help traders assess market sentiment over a period of time.
For the calculation, three indicators of the previous day are traditionally used:
- Maximum price;
- Minimum price;
- Closing level.
Pivot points are very important and are used by professional traders not only in Forex but in general in all markets.
Pivot points used to be calculated manually by five different formulas:
6 horizontals are calculated: 3 resistance levels (R1-R3) and 3 support levels (S1-S3). The formula for calculating the central level Pivot is the arithmetic average of three types of prices.
Pivot = (Max + Min + Close)/3
R1 = Pivot + (Pivot – Min)
R2 = Pivot + (Max-Min)
R3 = Max + 2*(Pivot-Min)
S1 = Pivot – (Max-Pivot)
S2 = Pivot – (Max-Min)
S3 = Min – 2*(Max-Pivot)
Max and Min — maximum and minimum prices, Close — closing price.
De Mark formula
This formula assumes the calculation of only two horizontals. The approach to calculating the base reversal line has also been changed.
If Close is less than Open Pivot = Max + 2*Min + Close
If Close is greater than Open, Pivot = 2*Max + Min + Close
If Close = Open, Pivot = Max + Min + 2*Close
S1 = Pivot/2 – Min
R1 = Pivot/2 + Max
Woodie Pivot point formula
The formula is similar to the classic calculation, the resistance and support lines are calculated in the same way. But standard calculators use only four levels instead of six. And the second difference is that the weight of the closing price in the calculation of the base horizontal has been increased.
Pivot = (Max + Min + 2*Close)/4
R1 = Pivot + (Pivot – Min)
R2 = Pivot + (Max-Min)
S1 = Pivot – (Max-Pivot)
S2 = Pivot – (Max-Min)
The formula involves the calculation of 8 lines of resistance and support without calculating the base level of the Pivot reversal. The coefficients are added to the calculation, and with them the price contacts the levels more often, therefore this method is recommended for scalping and short-term trades on short timeframes.
R1 = (Max-Min)*1.1/12 + Close
R2 = (Max-Min)*1.1/6 + Close
R3 = (Max-Min)*1.1/4 + Close
R4 = (Max-Min)*1.1/2 + Close
S1 = Close – (Max-Min)*1.1/12
S2 = Close – (Max-Min)*1.1/6
S3 = Close – (Max-Min)*1.1/4
S4 = Close – (Max-Min)*1.1/2
Fibonacci coefficients are used to calculate the levels of deviation from the Pivot base level. The formula for calculating the baseline is similar to the classic version.
Pivot = (Max + Min + Close)/3
R1 = Pivot + (R*0.382)
R2 = Pivot + (R*0.618)
R3 = Pivot + (R*1.00)
R4 = Pivot + (R*1.618)
S1 = Pivot – (R*0.382)
S2 = Pivot – (R*0.618)
S3 = Pivot – (R*1.00)
S4 = Pivot – (R*1.618)
R = Max – Min
In addition to manual calculation methods, now you can use special services that independently calculate the Pivot level indicator and draw it on the chart. Such services simplify the life of a trader and help to avoid complex mathematical calculations.
Forex trading with Pivot levels
Pivot levels are usually used for intraday trading. To do this, the Pivot lines calculated for the past trading day are applied to the chart. If trading is conducted on Monday, then lines for Friday are plotted on the chart, since weekends are not taken into account.
The first thing a trader should do after setting the levels is to determine the position of the opening price of the current trading day:
- If the Open price is above the main Pivot line, then most likely an uptrend will develop and you should look for entry points into a long position.
- If the Opening price is below the main Pivot line, then with a high probability the price will follow a downtrend and you should look for entry points to a short position.
The second most important lines after the Pivot Point are the first resistance level (R1) and the first support level (S1).
The market is entered at the moment when the price breaks through the R1 or S1 level, or bounces and reverses from them. If the price has reached the next level (R2 or S2), then this indicates that the asset is oversold or overbought. At this point, it is recommended to close active trades, as the asset price trend is highly likely to reverse.
Thus, if the opening price is above the Pivot line of the previous day and the chart continues to rise, then you can go long. In this case, the immediate target of the transaction will be level R1, at which the take-profit action should be set. If the price breaks this level as well, then the next target will be R2, and then R3. You can enter the market with two or three lots, setting the take-profit of the first one to R1, and the take-profit of the second one to R2.
If the opening price was below the Pivot level and the chart continued to fall, then it would be necessary to go short. The first target of the trade would be the S1 level. If the price broke through it, then the next target would be the S2 level, and so on.
Trading at breakout of Pivot levels
Let’s take an example of trading in a market with a downtrend. The Pivot level was broken from top to bottom and the opening price of the current day was below it. This means that you need to look for points to place sell orders. To protect the deposit, we will use a stop-loss, and to fix profits, we will use a take-profit.
The first take-profit is set at the S1 support level. A protective stop-loss order is placed just above the Pivot level. Further, if the price continues to steadily move to the S1 level and breaks it, take-profit can be moved to the second level – S2. Stop-loss is moved to line S1, thereby fixing part of the profit.
Experienced traders do not recommend opening a trade immediately after the Pivot level has been broken. It is advisable to wait until the price tests this level again, and only after that enter the market. This approach is less risky and more suitable for beginners. However, it also brings less, since you can miss a sudden and rapidly developing trend.
Scalping with Pivot levels in the Forex market
Such trading is carried out when the price moves within the range – the channel is limited by the levels S1, S2, S3 and R1, R2, and R3. This style of trading is called scalping. The higher the timeframe of the working chart, the more accurate and rarer the signals will be. Also, when scalping, it is important to consider how many times the price has tested the border of the range. According to the rules – the more often the level was tested, the more reliable it is.
Before trading, determine which levels will be taken outside the range. To begin with, it is recommended to use the S1 and R1 levels – they are the strongest and most reliable, and the price tests them more often. Levels S2 and R2 are tested less frequently. The price does not often reach the S3 and R3 levels at all.
A buy deal can be opened when the price bounces off the S1 line. We put Sl a few points below this level. Take-profit is placed on line R1. When the price reaches R1, the trade will be closed by take-profit.
A sell trade can be opened when the price bounces off the R1 level. Stop-loss is placed above the same level. Take-profit is placed on the S1 line. After the price reaches this level, the trade will be automatically closed by take-profit.
Thus, you can trade as long as the price moves in this range and bounces either from the upper or from the lower border.
Tips for applying Pivot levels in Forex trading
Empirically, traders have identified several basic rules for using Pivot levels in trading:
- You should not rush to open a new deal at the moment when the price is near the central Pivot point and is not in a hurry to break through it. It is advisable to wait until the chart confidently moves to the S1 level.
- It is advisable to trade in the direction of the trend. That is, if the trend is up, then you need to look for moments to enter the purchase, and if it is down, then sell.
- Do not forget that the price can either break through the levels R1, R2, R3 and S1, S2, and S3 or rebound from them. Therefore, do not rush to decide on the direction of the transaction.
- When trading intraday, take into account the news of the economic calendar. Do not trade 30 minutes before and after they are posted.
- Keep in mind that after the release of important news, the price may fly up or down, breaking through all Pivot levels.
- The extreme limits of the range for highly volatile pairs are the levels R3 and S3. The price on the charts of assets with lower volatility rarely reaches them.
- When the price moves within the range, it is recommended to use the scalping strategy.
When trading by Pivot levels, you can and should use other tools that will filter out false signals. Such an analysis will be more complete and qualitative, which will invariably lead to improved trading results.
Forex Social trading
As an alternative to manual trading using Pivot analysis, Copy trading or its broader version of Social trading can serve. Social trading in the Forex market is the practice of copying the trades of other participants through the social media community. The trading community can be used as a place to get ideas and discuss your own strategies. For Social Forex trading, there are many different ways to communicate with other traders, including forums, profiles, blogs, signal services, brokers, and special platforms that provide the ability to copy. All these forms of social communication help traders of all levels interact with each other and improve their trading strategies.
Social Forex trading offers a unique opportunity for beginner traders. It allows them to follow others and interact with more experienced traders as they trade. It is also designed for more experienced traders, as it allows them to become leaders in trading and earn by gaining more and more followers.
The eToro broker is a fully functional Сopy and Social trading platform. This is a highly specialized company that has chosen the Social trading sector as its main niche. For more than 10 years of existence, eToro has been able to develop and offer innovative technologies in the field of online trading and auto-following – instant copying of transactions with the ability to constantly monitor the actions of the trader in the web terminal.
With eToro’s CopyTrader features, you can not only copy all trades but only reflect new trades opened by your colleague after the copy action has started. In addition, eToro has introduced the Pause Copy feature in CopyTrader, which allows you to stop copying a trader without actually closing all currently open positions.
Besides, the company has such an amazing feature as eToro’s Smart Portfolios. Each Smart Portfolio brings together a different asset or group of traders and is continuously optimized by machine learning algorithms.
Top VPN service for Forex trading
Over the past few years, the situation in the world has changed quite a lot and everyone began to sharply block each other for the most far-fetched reasons. And it’s not just about traders and brokerage websites. Many streaming services are also only available to residents of certain countries. For example, for many years, Netflix was available only to Americans, and in Europe, a bunch of American sites was banned and vice versa. In order to bypass all restrictions, many traders use proven VPNs for Forex trading.
In essence, this is a small program for a smartphone or computer that passes your data through an intermediate server located in another country. At the same time, the data channel is encrypted securely. And any third-party oversight will not be able to peep, even if they really want to, whether you go to a blocked site or somewhere else.
In addition, in the case of using public Wi-Fi, VPN will help protect sensitive information such as logins, passwords, and activity history, as well as credit and payment information from leakage, and also prevent various phishing attacks.
Surfshark VPN is a great service for Forex trading that can run on any popular operating system. In addition to convenient platforms, Surfshark VPN stands out for its lack of limits on the number of connections and traffic volume. Besides, Surfshark VPN has useful additional features to improve the user experience with good speed indicators: whitelisting sites and connection networks, Kill Switch when the VPN connection is lost, double tunneling, assignment of static IP addresses, and much more. Notable advantages are support for torrent protocols and unlocking many streaming services.
Click the button below to get the best VPN deal for Forex trading:
Overall, Surfshark is a reliable VPN service provider with top-notch hardware, high-speed servers, and state-of-the-art encryption methods.
Top trusted brokers for Forex trading
Pivot-level trading is a good strategy for both a novice trader and a professional. Easy to set up and use, it helps to determine support or resistance levels as accurately as possible. By taking the time to identify Pivot Points, you can gain additional confidence in entering or exiting trades near these levels.
To try trading using Pivot Points and not lose a real deposit, you can always use trading demo accounts from popular international brokers. Besides it is also possible to open several real accounts in order not only to test their strategies on different trading platforms but also to try different tools and collect all kinds of Forex bonuses up to 100% on the first deposit.
Register, verify accounts and start trading with the leading Forex brokers below to compare trading platforms, select multiple instruments and check order execution times.
Exness Forex trading
Exness is a broker providing affordable Forex and CFD trading services to traders around the world. The company works only with proven partners and closely monitors the quality of service provided to customers. For example, participants can choose between the MetaTrader 4 or MetaTrader 5 terminals, as well as Exness’s own web terminal, which includes an intuitive interface with unique charting technology, as well as more than 50 drawing tools and 100 indicators. To ensure uninterrupted access to trading and terminal options, the broker’s application for smartphones allows.
Clients can register accounts for retail and professional traders. Also, for the convenience of new clients, the broker offers a trial demo account. It becomes available immediately after registration on the Exness Internet resource. It allows you to get acquainted with the capabilities of the broker, and verify the competence of the technical assistance department and the functioning of the terminals.
Broker clients can easily fund their accounts using various means such as MasterCard/Visa, Bank Wire payment transfers, CashU, WebMoney, etc.
The activity of the broker is extremely transparent. This company meets the brokerage standards of such regulators as FCA, CySEC, FSCA, FSC, FSA, and others. Try trading with Exness using our dedicated button below.
NAGA Markets Forex trading
NAGA Markets is a well-known brokerage company regulated by several financial European licenses, including the FCA, MiFID II, MiFIR, and CySEC, offers desktop and mobile versions of MT4 and MT5 for trading, as well as its own NAGA Trader platforms (Mobile application and web version ) with the ability to trade various instruments in different markets – Forex, stocks, indices, commodities, Cryptocurrencies.
In addition to independent trading, the company’s clients can copy the trades of other traders or give others the opportunity to copy their deals. An excellent combination of platform features enables the company’s customers to trade, copy and communicate – this is a modern social trading platform offered by NAGA.
Clients can deposit and withdraw funds using different payment methods on the platform such as bank transfers, cards, other payment methods (for example, Skrill, P24), as well as Cryptocurrencies. Try trading with NAGA and get a special offer from TopForex.trade by clicking on the button.
HF Markets Forex trading
HF Markets – before rebranding known as HotForex – is one of the most popular Forex service providers not only in Europe but also in the international market, which has such assets as indices, currency pairs, energies, CFDs, and more in its list of offers.
The brokerage company strives to provide traders with the most flexible trading conditions, depending on the opportunities and style of trading. Several types of accounts can be registered on the HotForex official website: Micro, ZeroSpread, Premium, PAMM, Islamic Account, and HFcopy, as well as a demo account that exactly repeats all the functions of real ones to gain experience and start trading live like a pro.
In addition to the proprietary MetaTrader as a trading terminal in desktop, web, and mobile versions, the broker offers traders both MT4 and MT5 platforms to enjoy different timeframes, indicators, tools, speeds, and generally everything, many traders tend to stick with MT4. HF Markets also provides a VPS service for a stable connection.
The company also pays great attention to analytical forecasts, having analysts in its team, and the training process for novice traders. Webinars are held on an ongoing basis, and training manuals have been developed both in text and video format.
The company is governed by CySEC and the FCA (Europe), the FSCA (South Africa), and the DIFC (Dubai), which are the authoritative bodies carefully monitoring all deals. You can start your trading journey with HF Markets by tapping the button below.
XM Group Forex trading
XM Group is a company that has been providing remote trading services in the global financial markets since 2009. Clients of the XM broker have access to a huge number of instruments, including the foreign exchange market, the metal market, and the energy market. In addition, there is an opportunity to trade on the shares of the world’s largest companies.
XM has different terminals, both the usual MT4 and MT5 and WebTrader for trading through a browser without downloading. You can use them on various devices and as an application for iOS and Android.
Traders can choose between several types of accounts that differ in their conditions and are focused on different client groups, including Micro, Standard, XM Ultra Low, and Shares. The company meets newcomers to the financial and currency markets by offering to use a free demo account to start learning and testing trading strategies. In addition, a huge array of educational materials is presented on the site of the Forex broker XM.
XM Group is one of the most protected and secure brokerage companies. Forex broker XM holds most of the world’s prestigious financial licenses such as ASIC, CySEC, IFSC, and DFSA. The broker also has a very attractive bonus program of 100% for the first deposit and provides the opportunity to connect to a virtual private server (VPS). You can try trading with XM Group and get a special offer from TopForex.trade by clicking the button below.
AvaTrade Forex trading
AvaTrade is a large international brokerage company, one of the leaders in the market for providing online trading services for currency pairs, commodities, indices, stocks, CFDs, Cryptocurrencies, and many others.
Forex broker AvaTrade has many trading platforms and software that create a comfortable trading environment, including MetaTrader 4/5, WebTrader, AvaOptions, and AvaSocial – a CopyTrading platform, AvaTradeGo, and Auto Trading – platforms for automatic trade, including ZuluTrade and DupliTrade. The AvaTrade platforms are also available on mobile devices for iOS and Android.
The advantage of trading with AvaTrade is tight fixed spreads, no commissions, and a flexible minimum trading account size. You can also try trading with a free $100000 demo account.
AvaTrade has a very formidable regulatory base and is licensed by such institutions as IIROC, BVIFSC, FSCA, ASIC, ADGM, FSA, and FFAJ. You can learn more about trading with AvaTrade and test different trading platforms by clicking on the button.
Expert explanation of technical analysis in Forex trading: main application areas, essential technical indicators, and guide on their interpretation for successful trading decisions.
All you need to know about trends in the Forex market: its types, lifetimes, phases, and popular tools and indicators for determining the trend, as well as a comparison of Top Forex and CFD brokers with Copy features, user-friendly trading platforms, demo accounts, Forex bonuses of up to 100% on the initial deposit, and free VPS service.
How to use risk management tools in Forex trading: key order concepts, and their usage examples, as well as the best Forex brokers with user-friendly trading platforms, bonuses up to 100% on the initial deposit, and free VPS service.
Pivot Points in Forex trading - FAQ