Pivot points are a type of chart used to analyze the direction of market price movement. This is a tool to assist investors in making investment decisions. However, many investors do not clearly understand the meaning and how to use Pivot Points in financial transactions. So, let’s join Forex Trading to learn What is a pivot point and methods to effectively apply Pivot Points in Forex investment transactions through the following article!
Overview of pivot points
Below is detailed information about what the Pivot Point concept is and how it is calculated.
What is a pivot point?
Pivot is a term borrowed from French, meaning “a turning point”. It is the point where a trend begins to change direction, moving in the opposite direction. In other words, Pivot is the point where an increase will turn to a decrease and vice versa.
Pivot Point, or PP (pivot point), is the average value of the highest price, lowest price, and closing price of the previous trading session. PP is used to determine support and resistance levels in the current trading session.
What is the pivot calculation formula?
Pivot point calculation formula:
Pivot point = [Highest price (previous period) + Lowest price (previous period) + Closing price (previous period)] / 3
From the Pivot point calculation formula, we can deduce the calculation of 3 resistance levels as follows:
- R1 = (Pivot Point x 2) – Low price (previous period)
- R2 = (Pivot Point – S1) + R1
- R3 = Pivot Point – (R2 – S2)
From the Pivot point calculation formula, we can deduce the calculation of 3 support levels as follows:
- S1 = (Pivot Point x 2) – High price (previous period)
- S2 = Pivot Point – (R1 – S1)
- S3 = Pivot Point – (R2 – S2)
See more: Be more successful through this technical analysis
Trader’s assessment of pivot points
Pivot points have emerged as an effective support tool for traders, especially Pivot chart. Helps them identify market trends and make informed trading decisions. So, what value do pivot points have for traders?
What are the strengths of pivot points?
What are the advantages of What is a pivot point? We’ve got you covered below
- Recommends determining specific price levels to time potential purchases and sales. When the price surpasses the Pivot point, it shows that sellers are in control and investors should consider selling or closing buy orders. On the contrary, when the price is below the Pivot point, it shows that the buying side is stabilizing and investors can consider buying or closing sell orders.
- Pivot points are essentially used to determine support and resistance levels. Helps investors detect price movement points at these levels. It may hint at a possible price reversal at these levels or a continuation of the current trend if they are crossed.
- The Pivot Point tool can be applied to charts of any time frame. Helps investors with comprehensive technical analysis.
- Combining Pivot points with other indicators such as RSI, MACD or trading volume can enhance the possibility of trading success.
What is the trader’s assessment of the pivot point?
Disadvantages of what is a pivot point
Some possible disadvantages of the pivot are as follows:
- Analysis during the trading day is sometimes difficult to .drawdown Because the price can change many times compared to the daily pivot level. Confusing for new investors and complicating the evaluation of Pivot points.
- Pivot points do not measure the strength of a trend. Leading to uncertainty about the reliability and duration of the movement. To minimize errors, it is necessary to use many different tools to determine Pivot points. Like high/low plotting, chart patterns, and channel indicators. Combining many of these levels with Pivot data increases accuracy.
- Another limitation of the Pivot method is that it does not take into account external factors that can influence the trend. So it is necessary to combine both technical and fundamental analysis to have a comprehensive and reliable investment strategy. Don’t just rely on technical analysis, but also consider other factors such as market events and economic news.
What is an effective pivot point trading method?
The Pivot Point trading method is like a compass for investors in the volatile financial market. Below are some effective trading methods with pivot points.
Use pivot point to trade in range
When candle prices encounter resistance or support, the market is often unclear for trading. In this case, use Pivot Points to determine buy and sell points. Investors can buy near support points and sell near resistance points to optimize profits.
Trade breakout points
There are two methods of trading pivot points according to Breakout, what are they?
- Place a buy-stop/Sell-stop order at a price level farther from the resistance/support level. Then take profit when the price touches the nearest support/resistance level.
- Wait for the price recovery after the Breakout. Then execute the order, and end the trade when the price reaches the nearest support/resistance level
How to trade breakouts .
Trade along the central PP line
In this way of trading, investors need to observe appropriate signals. When the price candlestick rises from the bottom to above the PP line and contacts the resistance line of the price candlestick, a bearish candlestick reversal pattern may appear. Investors should place a sell order when the price candlestick nearly touches the resistance line.
What should you keep in mind when trading with Pivot?
To take advantage of Pivot Point most effectively, investors need to pay attention to the following:
- Since Pivot Point uses a unique formula, its signals over a day are constant. Therefore, investors need to coordinate it with other indicators to improve prediction accuracy.
- Set stop-loss and take-profit points for each trade using Pivot Point to minimize risk.
- Develop a sound risk management and capital allocation strategy when trading with Pivot Point.
Conclude
Above is all the knowledge about What is a pivot point in forex trading that we want to share with investors. Hopefully, investors have a clear understanding of the Pivot concept in forex trading. And know how to apply it in market analysis. Follow Forex Trading for more useful information about important lines and indicators in the financial market.
Frequently asked questions
Why are pivot points important in forex trading?
Pivot points are important in financial transactions. Because it provides important information about support and resistance levels in the market. Traders often use pivot points to determine entry and exit points into the market, as well as to manage risk.
What variations of pivot points are there that traders commonly use?
Some common variations of pivot points include Fibonacci pivot points and Camarilla pivot points. These variations use different calculation formulas to create support and resistance levels.
How many types of pivot points are there and what is the difference between them?
There are three main types of pivot points: Daily Pivot Points, Weekly Pivot Points, and Monthly Pivot Points. The main difference between them is the time of application: daily pivot points are calculated based on one trading day’s data, weekly pivot points are based on one week’s data, and the same goes for monthly pivot points.
