Forex pivot points are widely used by traders to gauge bullish or bearish market sentiment with the standard method of calculating pivot points being the most popular.
There are however other methods that can be used to calculate forex pivot points which include: Woody Pivot Points, Camarilla Pivot Points, and Fibonacci Pivot points etc.
Which method a trader decides to use is entirely up to their trading methodology since there is no single best method but when you use pivot points in forex trading and combine them with other trading tools they do become a very helpful tool that any trader should consider using.
My favorite pivot point indicator uses Fibonacci ratios and I particularly like this pivot point method because so many traders watch important Fibonacci levels to determine where support or resistance might step into a market.
Fibonacci pivot point levels are calculated by multiplying the previous trading day’s range with the most commonly used Fibonacci levels i.e. 38.2%. 61.8%, 78.6% and 100%.
Once these figures are determined they are simply added or subtracted from the standard pivot point to create Fibonacci pivot point levels.
On the chart above, I loaded my Fibonacci Pivot Point levels on a 4-hour chart of the AUD/USD forex pair but instead of calculating my Fib pivots using the previous day’s range, I like using the pivots for the entire previous week’s range.
What follows next will be an explanation of how I recently used Fibonacci pivot points, in combination with other drawing techniques to trade the AUD/USD.
AUD/USD has been in a strong downtrend prior to the October 2019 low but started correcting higher into the 31st of December 2019 high. I have been following the price action on the AUD/USD since last year December and assumed that price might simply be correcting higher before the main trend lower would resume later.
My strategy uses market geometry in an attempt to find the end of corrections and as you can see on the chart above, price reached my upper channel line on the 31st of December 2019 and reversed lower.
Price also reached a 100% Fibonacci extension level at the same time the reversal took place, giving me enough evidence that the correction I was following probably ended and that I should next proceed to find an entry to short AUD/USD.
Since the 31st of December high, price came down hard into the 8th of January low and started correcting to the upside, but it wasn’t until the 15th of January that I again used another market geometry tool called a pitchfork to gauge where a lower high might materialize before another leg lower could follow.
Note: You will often find that corrections tend to end at a pitchfork’s upper/lower median lines or the upper/lower lines of a channel, so I was waiting for AUD/USD to interact with my upper median line first to see whether price will react lower from there.
It was at this stage that I immediately pulled up my Fibonacci Pivot Point indicator to see whether there was additional confirmation from my forex pivot points that an important lower high might form at my upper median line.
AUD/USD only reached my upper median line on the 16th of January 2020 and the pivot point levels on my chart above were calculated using the entire previous week’s information i.e. the 6th of January – 10th of January data.
Remember that traders use pivot points to gauge market sentiment i.e. above the centre pivot indicates a bullish bias and vice versa but they also watch the upper and lower pivots to anticipate where support or resistance might step into a market.
This is where I like using my Fibonacci Pivot Points differently. Note that when price eventually reached my upper median line that it stopped short of my first resistance pivot point line (upper red arrow), which is a common occurrence using the calculation method I use.
But look at what happens when you draw Fibonacci retracement levels from the R1 to the S1 pivot points. Price found resistance at the 0.786% Fib retracement level measured between those two pivots and prior to that at the 0.618% Fib retracement level.
There was, therefore, a confluence of multiple resistance lines at that lower high i.e. the upper median line, centre channel line and a 0.786% Fib retracement level.
Once price then reacted lower from that area of confluence and closed below my centre pivot point did I have enough confirmation that I should short AUD/USD.
The chart above shows another example of using the Fibonacci retracement tool between forex pivot points, but this time in an uptrend. This time, a correction ended at the lower median line of a pitchfork and a 0.786% Fib retracement level drawn between the S1 and R1 Fibonacci pivot points. Then once price broke above the centre pivot point and closed above it could an entry been taken to the upside.
The forex pivot point indicator can be used in many ways but I like using it in a unique way and as an additional confirmation method that a correction might have ended, especially when there is a confluence of multiple techniques present at a potential top or bottom.
In the end, there is no correct way to use the pivot point indicator but what is important is that you should experiment and test forex pivot points until you have found enough confirmation that this indicator can be used as part of your strategy and built enough confidence in using it.