Forex pivot points is a technical indicator used to determine potential turning points in the price action. It is one of the most commonly used indicators for identifying resistance and support levels in day trading.
In this guide, you’ll learn:
By applying technical analysis, Forex pivot points are widely used by traders to gauge bullish or bearish market sentiment. There are multiple types of Forex pivot points, with the standard method of calculating pivot points being the most popular.
Forex pivot points are identified in order to determine “interesting” levels. These are marked by traders to note points where the market could change from “bullish” to “bearish.” Hence, traders of financial markets use these points to identify support and resistance levels.
There are multiple types of Forex pivot points, with the standard method of calculating pivot points being the most popular. Other than that, there are other techniques that are used to calculate forex pivot points, including:
Each of these pivot points types is calculated differently. For some, the idea of looking at a pivot point formula for trading might seem overly complicated. However, the math behind these formulas is relatively basic.
For instance, the formula for standard (floor) pivot points calculations is as follows:
Resistance 1 (R1) = (Pivot Point x 2) – Low
Resistance 2 (R2) = Pivot Point + (High – Low)
Pivot Point (PP) = (High+Low+Price Close) / 3
Support 1 (S1) = (Pivot Point x 2) – High
Support 2 (S2) = Pivot Point – (High – Low)
Once calculated, Forex traders mark these levels on a chart. Daily traders tend to calculate daily pivot points using the data from the previous trading session.
As noted above, pivot points are used to identify support and resistance levels on a chart. Once calculated, these are then marked on the chart to determine where the market may stop or accelerate its run.
Therefore, pivot points are practical technical tools that can help us mark the resistance and support levels. In layman terms, Resistance levels indicate where there will be a surplus of sellers and vice versa.
These two refer to an upper or lower obstruction that is facing the price action. Once the price movements touch these levels, we expect a certain type of reaction. For this reason, we use pivot points to identify levels that may attract the price action.
In general, there are two types of traders: Those that look to trade breakouts and those who prefer breakouts. Both groups can base their trades on pivot points. This versatility and easy-to-use are exactly what makes pivot points popular.
In the example below, we see the EUR/USD chart. Based on the classic formula, we calculated pivot points based on the data from a weekly chart. In a range trading style that is mostly used by day traders, we simply sell the pair when it approaches R1. Conversely, we should look to buy the pair when price action reaches S1.
The stop-loss should be placed above R1 if we are selling, and below S1 if we are buying. This way, a stop-loss order is usually near, hence you will avoid high-risk trades. A break of these price levels means that our trade idea is invalidated. Believers in range trading will keep selling and buying until the market environment moves from ranging to trading.
The opposite approach is based on breakouts. While using the same example, we see that EUR/USD breaks through the R1, after ranging between S1 and R1. Breakout traders will advise buying a break above R1 and below S1. This way, you have practically decided to adopt the “ride the trend” strategy.
In addition to breakouts and range trading, traders use other pivot point trading strategies. Here, we will share two basic pivot points trading strategies to further advance your Forex trading arsenal.
The moving average convergence/divergence (MACD) is a popular trading indicator. It is mainly used to gauge the market’s strength, direction, momentum, and duration of a trend.
We use the same example to demonstrate how to combine pivot points and MACD. In the bottom part of the page, you see a separate window for MACD. Two lines – MACD (the blue line) and signal (the yellow line) – are interacting with each other.
Once the short-term line – MACD – moves above the slower line – Signal – a buy signal is initiated. This signal is then cross-checked with the price action to verify whether the price is near the pivot points support.
The yellow arrow at the bottom shows a crossover that coincides with the price action trading at the S1. A long position should be taken with a stop-loss placed below S1. Setting a profit-taking order depends on your R:R preferences. In general, a move back to PP is advised as a target.
The relative strength index (RSI) is arguably the most commonly used momentum indicator. Among other things, it produces divergence signals that are used to generate trade ideas.
In this particular case, we notice the RSI positive divergence. This means that the price drops but the RSI is moving higher. A positive divergence generates a buy signal as the price action is expected to catch up with the RSI.
Similarly to the MACD trading strategy, the positive divergence takes place near S1. Hence, we take a long position in EUR/USD, targeting a move back to PP. A more aggressive trading style could also aim for a trip to R1.
Pivot points are reliable as much as any other technical indicator. If you want to focus on reliability, then use data from higher timeframes, such as daily, weekly and monthly charts. This is because the longer period pivot points are more reliable due to the increased data set.
There are different formulas for calculating pivot points. For instance, the formula that calculates standard (floor) pivot points is: Resistance 1 (R1) = (Pivot Point x 2) – Low Resistance 2 (R2) = Pivot Point + (High – Low) Pivot Point (PP) = (High+Low+Price Close) / 3 Support 1 (S1) = (Pivot Point x 2) – High Support 2 (S2) = Pivot Point – (High – Low)
R1, R2, and R3 are resistance levels identified on a chart. These levels are calculated by measuring the distance from the pivot points. If the price action breaks above the pivot point (PP), then R1, R2 and R3 are marked as next targets. They are calculated as follows: R1 = (2 x Pivot) – Low R2 = Pivot + (High – Low) R3 = High + 2x (Pivot – Low)