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
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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.
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Pivot Points in Forex trading - FAQ