What is the pivot point In Forex trading? How does it work?
You want to purchase a shirt that you can wear to both professional and informal occasions, but you have a restricted budget. Therefore, if you can buy a shirt within your budget and achieve your goal, you are in a win-win position. You have extracted the finest output from the garment, correct?
Curious as to how this pertains to international exchange trading or the Foreign exchange market? Indeed, a strong relationship exists. Because practically every trader want the finest possible forex market outcome. The Pivot Point Forex Trading Strategy is just such a strategy!
Hence, I'm assuming you wish to achieve the finest results possible on the forex market. Moreover, hundreds of traders choose the pivot point trading strategy over all others.
Numerous intraday and short-term traders employ pivot points as a kind of support and resistance. In addition to trading using pivot points, the same criteria apply to other support and resistance trading strategies.
During the Russia-Ukraine conflict, currency trading is more volatile than usual. In this circumstance, the forex market is unstable. However, using a pivot point strategy, you may trade with confidence.
As pivot points are regarded as the most important aspect of intraday trading, the majority of traders make them their first priority. Let's begin with a quick overview of pivot point fundamentals, and then we'll provide the techniques and other important variables.
What Are Forex Pivot Points Exactly?
The Forex pivot points are computed based on the charted price levels. These indicators indicate extremely crucial decisions where the price might be reversed, especially when it is the level's initial contact.
The majority of traders base their trading decisions on the pivot points strategy, and intraday traders also pay close attention to it.
History of pivot points
Floor traders utilized pivots in the stock markets. In this computation, the market analyzes the previous day's highest and lowest prices as well as the daily closing price.
It assisted them in identifying crucial levels on trading days. Due to their forecasting qualities, pivots are a crucial signal of trade. Its pivot points have the day's highest value. Essentially, they indicate an equilibrium between bullish and bearish forces.
The stock market will be positive if prices move over this pivot point. During price peaks below pivots, negative sentiment might be observed.
What is a Pivot Point Strategy for Forex Trading?
Pivot point Forex trading strategy is used to mimic a change in market sentiment and to determine broad trends over a period of time, as if they were pivots from which trading swings either rise or fall.
Initially employed by floor brokers for equities and futures trading, support and resistance levels are now most commonly employed to verify trends and limit possible losses.
As with other methods of trend line analysis, pivot points focus on the major relationships between the high, low, and closing prices between trading days.
Although it is applicable to various trading instruments. However, pivot points are incredibly valuable when employed by foreign exchange market traders when trading currency pairings. Fibonacci pivot points are the focal center of this strategy, in my opinion.
The foreign currency market is quite volatile and has a high level of liquidity. Consequently, trading using high-volume instruments decreases the impact of market manipulation. It may capture notions of support and resistance generated by pivot points. Also tough is sustaining support and resistance levels.
Pivot Resistance and Support Calculation
As previously said, we will concurrently dissect every pivot resistance and support calculation. So, here is the initial estimate for pivot resistance and support:
- R1 = (2 x Pivot Point) – Daily Low
- S1 = (2 x Pivot Point) – Daily High
Now, it's time for the second pivot resistance and support calculation:
- R2 = Pivot Point + (Daily High – Daily Low)
- S2 = Pivot Point – (Daily High – Daily Low)
Finally, we are reaching the third pivot resistance and support calculation:
- R3 = Daily High + 2 x (Pivot Point – Daily Low)
- S3 = Daily Low – 2 x (Daily High – Pivot Point)
All calculations are simplified so that you easily comprehend the pivot resistance and support levels.
The pivot resistance and support calculation may be referred to by different terms, but the methodology is the same.
What is a Pivot Point indicator?
Today, nearly every trading software includes a pivot point indicator that calculates and plots levels on your trading chart.
You must first examine the features of your trading program. If you cannot discover it, you should conduct more investigation.
You may discover several pivot point indicators on the Internet, which you can add to your trading chart. Multiple free pivot point indicators are accessible on the internet, from which you may select the one that best suits your needs.
First, you must import the pivot point indicator, then navigate to the location of your indicator file and click export.
Once the operation is completed, you have immediate access to the pivot point indicator on your trading chart. After completing all steps, you finally view the following image:
This chart displays the EUR/USD for the 30-minute timeframe frame. If you observe horizontal lines on the chart, you have the correct indication. These are the deciding factors. The blue line in the chart represents the pivot point.
Above the lines, the R1, R2, and R3 are the primary pivot points. And underneath the blue lines, the S1, S2, and S3 are displayed. The S2 and S3 are nonetheless not visible. In this chart, three more vertical lines were added.
It represents three distinct trading days. Examining the pivot levels closely reveals that each trading day is aligned independently. Because each trading day has its own high, low, and close prices.
Therefore, the pivot levels differ from one another. For this reason, the pivot lines for each trading day see a quick change in level.
How RSI Divergence React At Pivot Resistance/Support?
The reward-to-risk ratio is often rather high. Where we have seen the most recent high or low for a buy, the risk is rather apparent.
This example illustrates the calculation of pivot points using weekly data. Where the R1 acts as firm resistance at 1.2854 (first orb) and the RSI divergence indicates its upward potential was constrained.
This indicates there is a probability for a brief break below R1 with a stop placed at the recent high, which is now a support level:
- At 1.2853, sell short.
- Stop trading at the latest peak of 1.2885.
- 1.2784 is the pivot point limit.
- This first transaction yielded a profit of 69 pips with a risk of 32 pips. The ratio of benefit to risk was 2.16.
Pivot Trading Strategy
As we have reached the conclusion of the pivot point calculation section, we will now examine pivot point foreign currency trading strategies:
Price Movement
First, we will discuss how pivot points are utilized as part of the price action trading strategy without the use of any trading indicators. In order to participate in the market, we shall implement the standard regulations.
When entering the market on a breakout, we will place a stop loss below the previous pivot point. After the breakthrough, our aim will be the second pivot point level.
Please take note of this graph:
This is an H1 EUR/USD chart. Two tradable breakouts have occurred through the pivot point level.
The blue pivot line from the start of the chart to the initial breakout line. Your stop-loss order must be placed immediately on R1 (the first pivot level on the main pivot point). The aim, however, will be S2 (the second one must be under the main pivot point).
MACD
Now, we will implement the most popular MACD (Moving Average Convergence Divergence) indicator in this strategy. The primary objective of this strategy is a pivot point breakout.
There is the option of using a MACD crossover or divergence to reverse the trend. Upon receiving signals from the analysis of both indicators, you should enter the market. Stop loss must be set, as was the case with the preceding trading strategy.
Place your stop loss on an earlier pivot point. You should maintain your position until the MACD demonstrates an opposite crossing response. This chart graphic can greatly improve your vision:
This is the H1 chart for the USD/CAD currency pair (Date: Feb 19 - 26, 2016). This graphic clearly depicts one long posture and two short ones. MACD crossings and PP breakouts are the basis for the indications that you're observing.
Let's begin with the first trading opportunity, which is the short position. We discovered the first downward signal.
Since the MACD lines slope downward. After monitoring the chart, we noticed that the price was breaching the primary pivot point; this is the second negative indicator for the time being.
[Note: You must monitor the pivot level.]
Based on the strategy, it is now possible to short USD/CAD in this situation. As depicted, a stop loss should be placed above the R1 pivot point.
At Pivot point trading strategies, the price starts a downward trend. If we examine closely, we will notice that the major pivot point has been corrected (first dark bolt).
The price will then begin to decline from the pivot point level. The trade must be closed when the second hesitation in the bearish pattern causes a bullish cross of the MACD lines. Traders do have a possibility to gain 53 pips with this strategy.
Trading strategies based on pivot points alter the momentum of trading opportunities. Support and resistance levels, which are influenced by pivot points, affect the high, low, and closing prices.
As pivot points are well-known, traders utilize them for professional analysis. There are several sorts of pivot points available via Internet search. They each have their own unique formula, but the end effect is same.
Regardless of what this strategy affords traders, they must be alert for impending dangers. Preparation is the defensive step in the trading process. Keep in mind one thing,
"Trading is not for amateurs, fantasists, or the destitute. It demands above all a steady quality of commitment. Therefore, if you are going to trade, do so with seriousness "-Rod Casilli.
