Enter the complex yet fascinating world of the foreign exchange (Forex) market, one of the most important tools that professional traders use for technical analysis and determining entry and exit points The market is the Pivot Point. In this article, we will explore PP in detail, from its basic meaning to how to apply it effectively in Forex trading. Join Forex Trading to learn about this tool and how it can help you optimize your trading strategy in this exciting exchange market.
Learn about Pivot Points in Forex trading
Pivot Point is one of the important and popular tools in Forex trading. Used to identify potential support and resistance points on the price chart. This is a technical tool based on the average of the Open price, High price, Low price, and Close price of a specific period of time, usually in the previous trading day.
What is Pivot Point?
PP is a center point used in technical analysis to identify support and resistance points on a price chart. In trading Forex and other financial markets, PP is often used to shape trading strategies and decide market entry and exit points.
What role does Pivot Point play in technical analysis when trading Forex?
Pivot Point plays an important role in technical analysis when trading Forex, helping investors:
1. Potentially identify resistance or support levels:
- PP provides support and resistance prices based on the highest, lowest, and closing prices of the previous trading session.
- Support level: This is where the price tends to jump and turn up.
- Resistance level: This is where the price tends to level off or turn down.
2. Select entry/exit point:
- Buy entry point: When the price bounces from the support zone with strong buying pressure.
- Sell order entry point: When the price touches or surpasses the resistance zone with strong selling pressure.
3. Effective risk management:
- Helps investors determine a reasonable price to place stop-loss orders, limit losses, and protect capital.
- Combine PP with other technical indicators to more effectively assess the risk level of a trade.
How to calculate Pivot Point
There are several ways to calculate Pivot Points and the support and resistance points associated with it. Below are two easy-to-come-across methods that you can calculate easily:
Basic Pivot Point
The basic Pivot Point calculation uses the highest price (High), lowest price (Low), and closing price (Close) of the previous trading session. Here is the formula:
PP=(High+Low+Close)/
In there:
- High is the highest price of the previous trading session.
- Low is the lowest price of the previous trading session.
- Close is the closing price of the previous trading session.
Advanced Pivot Points
There are several advanced methods for calculating Pivot Point. Includes Fibonacci PP, Woodie PP and Camarilla PP:
1. Fibonacci PP method:
- PP = (High + Low + Close) / 3
- Support 1 (S1) = PP – (0.382 * (High – Low))
- Support 2 (S2) = PP – (0.618 * (High – Low))
- Resistance 1 (R1) = PP + (0.382 * (High – Low))
- Resistance 2 (R2) = PP + (0.618 * (High – Low))
2. Woodie PP method:
- PP = (High + Low + 2 * Close) / 4
- Support 1 (S1) = (2 * PP) – High
- Resistance 1 (R1) = (2 * PP) – Low
3. Camarilla PP method:
- PP = (High + Low + Close) / 3
- Support 1 (S1) = Close – (High – Low) * 1.1 / 12
- Support 2 (S2) = Close – (High – Low) * 1.1 / 6
- Resistance 1 (R1) = Close + (High – Low) * 1.1 / 12
- Resistance 2 (R2) = Close + (High – Low) * 1.1 / 6
See more: Be more successful through this technical analysis
How to use Pivot Point effectively in Forex trading
To use Pivot Point effectively in Forex trading, here are some ways you can apply:
Use Pivot Points to identify support and resistance zones in Forex
Step 1: Determine PP: First, calculate PP using the High price, Low price, and Close price of the previous trading session, using the formula:
Step 2: Identify support and resistance points:
- Support: Support levels are calculated based on PP and the highest price, lowest price, and closing price of the previous session.
-
- Support1(𝑆1)=(2∗PP)−
- Support2(𝑆2)=PP−( −Low)
-
- Resistance: Resistance levels are also calculated based on PP and the highest price, lowest price, and closing price of the previous session.
-
- Resistance1(𝑅1)=(2∗PP)−
- Resistance2(𝑅2)=PP+( − )
-
Analyze trading trends with Pivot Points
For traders who prefer medium and long-term trading, swing trading with pivot points can be done using weekly/monthly timeframes.
The chart below depicts a weekly chart with only added pivot points (this can be edited by changing the pivot settings on the platform). There has clearly been a reversal to the upside, which was evident after the price broke through the previous pivot resistance.
2. Breakthrough Strategy
- Downtrend: When the price sinks below the Pivot Point and continues to decline through the next support levels.
- Retracement: When the price turns back after reaching a key support/resistance level, this can be a sign that the current trend is weakening.
Use technical analysis Pivot Point to calculate risk and profit ratio
1. Determine stop-loss levels: Based on PP levels and support and resistance points, you can determine the price levels that should be touched.
2. Determine the take-profit level: You can use PP levels and support and resistance levels to determine the price level you want the price to reach. This could be the next resistance level or the next PP level.
3. Calculate the risk and reward ratio: This is often expressed as a risk/gain ratio (e.g. 1:2), i.e. the expected return is twice the risk.
Additionally, you can manage risk using Trailing Stop. So what is a trailing stop ?
In Forex trading, a Trailing Stop is a risk management tool used to protect profits when trading. Trailing Stop allows you to adjust your stop loss according to the market trend automatically.
Then you should:
- Manage position size: For example, if the risk/gain ratio is 1:2 and you decide to risk 1% of the capital, you can open a position where if the stop loss is triggered, you lose only 1% of the capital, but if the profit target is achieved, you will earn 2% of the capital.
- Monitor and adjust: This helps you protect profits and minimize risks during trading.
See more: Broker IC Markets and interesting revelations
Combination of Pivot Points with candlestick patterns
1. Identify trends using candlestick patterns:
Use candlestick patterns to determine the current trend of the market, whether it is bullish, bearish or sideways. Candlestick patterns such as Pin Bar, Engulfing, and Hammer can provide clear signals about the direction of price action.
2. Combining signals from candlestick models with PP:
When a Hammer candlestick pattern appears near a key support or PP level, this can be a strong buy signal. PP provides an important context for determining the level at which prices may turn around after a downtrend.
summary
While the Forex market is always volatile and unpredictable, Pivot Point has proven to be an extremely useful tool to help traders shape their strategies and make smart trading decisions. Based on simple yet powerful calculations, PP not only helps identify key support and resistance points but also provides an overview of price structure and market trends. Through the article, Forex Trading has made Pivot Points an important part of your trading strategy, helping you increase your chances of success and minimize risks in the Forex market.
FAQs
During what time can PP be used?
PP can be calculated and used for any timeframe. From short term to long term, but often used for short time frames such as H1, H4 or Daily.
How reliable is Pivot Point?
The reliability of PP depends on many different factors. Such as usage time, calculation, and market conditions. They are often used in combination with other technical analysis methods to increase accuracy.
Is PP suitable for all trading strategies?
PP can be integrated into many different trading strategies, from short-term to long-term trading. However, their use requires strong understanding and knowledge of the market.
