What Are Forex Pivot Points?
A pivot point is an indicator originally developed by floor traders in the commodities markets to identify potential price turning points. In forex and other financial markets, day traders use pivot points to determine likely levels of support and resistance. These levels can signal possible reversals in price direction, helping traders identify shifts from bullish to bearish trends or vice versa.
Understanding Forex Pivot Points
Unlike many other technical indicators, pivot points are designed to forecast potential market turning points. They are derived using straightforward mathematical formulas based on the previous day’s high, low, and closing prices. In the forex market, pivot points are calculated using data from the entire 24-hour trading period, with the closing price determined at the end of the U.S. trading session.
The classic pivot point calculations provide the main pivot point, which is considered the strongest of these indicators, along with three levels of support and three levels of resistance. Traders assess the price’s position relative to the main pivot point to determine whether the current session holds a bullish or bearish bias.
Pivot points are a cornerstone of technical analysis for many day traders. Their widespread use often contributes to their effectiveness, as market behavior near these levels can sometimes act as a self-fulfilling prophecy. While typically used for daily trading, longer-term pivot points can also be calculated using weekly, monthly, quarterly, or even annual price data.
Trading With Pivot Points
While pivot points can be effective at predicting potential turning points, traders still need a well-structured trading system to achieve consistent success. Like all trading strategies, this involves determining an entry point, setting a stop-loss level, and identifying a profit target or exit signal.
Some day traders use pivot points to establish key levels for entering trades, placing stop-loss orders, and determining profit-taking points, often by gauging where the majority of other traders might be doing the same. Free pivot point calculators are readily available online through retail forex brokers and third-party websites.
The most effective trading strategies typically combine pivot points with other technical indicators, such as trend lines, Fibonacci levels, moving averages, previous highs and lows, and previous closing prices. This approach enhances the reliability of trading signals and improves the overall decision-making process.
Basic Pivot Point Formula
The formula for calculating the primary pivot point, using the previous day’s high, low, and closing prices, is as follows:
This formula gives the central pivot point, which can then be used to calculate additional support and resistance levels for the trading day.
