Being a floor trader was a challenging profession in the past that few were interested in. It required concentration, fast thinking, and precise information because traders had to function in a dynamic environment. However, pivot points changed the concept.
Today, traders rely on pivot points to confirm trends and decrease the trading risk, but in a more modern and sophisticated fashion. This is done using technology, potential support and resistance, and reference points to determine market entering, place stops, and take profits.
These technical indicators determine price movements and thus market trends and represent the average of the high, low, and losing price between trading days. Check this article to get a more profound knowledge of pivot points in forex.
Types of Pivot Point Calculating Techniques
Pivot points are indicators of the overall market trend in a set period. Evaluating support and resistance pivot points may be done through several calculating techniques. This is an easy task for brokers who do it daily, but if you are at a loss, you should first find the right broker for your needs to help you navigate this matter.
The standard pivot point formula is the 5-Point System, but there are other techniques as well, like:
● Fibonacci pivot point technique – using Fibonacci levels to determine where support and resistance levels are located;
● Woodie pivot point technique – calculated based on past price points;
● Camarilla pivot point technique – formulas to generate potential resistance and support levels.
The information on the support and resistance levels is helpful for traders because they help them understand the probabilities. You can evaluate things ahead and limit the risk, but not with complete certainty.
The 5-Point System
The common pivot point calculating technique includes the average intraday high and low and the previous day’s closing price, coupled with 2 support levels and 2 resistance levels. The simple formula is as follows:
Pivot point = (high + low + close) / 3
Once the pivot point is acquired, it may be used to calculate estimated support and resistance levels for the current day.
Use of Pivot Points
Pivot points are used in several ways. One is to gauge the general direction through the base pivot point. It suggests a bullish bias if the market price is above the pivot point and a bearish if the price is below the base pivot.
The second possibility is to use support and resistance levels.
This works in a way that the trader aims at closing long positions when indicators suggest bullish conditions. When the market drops to support levels and indicators offer bearish conditions, the trader seeks to close short positions.
A third possibility is using the support and resistance levels to open positions. When the market reaches resistance, traders go short, and vice versa.
Pivot Point Trading Strategies
Traders always have an ace up their sleeve, meaning they use an additional strategy to ensure they have the best predictions. Some of these include:
● MACD pivot point trading – a popular trading indicator where the moving average convergence/divergence is primarily used to gauge direction, momentum, market strength, and trend duration.
● RSI Divergence pivot point trading – relative strength index is a momentum indicator that produces divergence signals for generating trade ideas. It is one of the most commonly used indicators.
Setting up Pivot Points
When trading with pivot points, traders have different approaches and rules for setting up pivot points. These differ for long and short traders; hence the rules are not the same.
The trader identifies the pivot point’s bearish divergence, usually R1. A short position stopping at the recent swing high is initiated once the price declines below the reference point. The limit order is placed at the next level, meaning that R1 becomes the target if sold at R2. When this happens, former resistance becomes the support.
Traders here identify the bullish divergence at the pivot point. Most often, this is S1. A long position is initiated once the price goes above the reference point. The limit order is placed at the next level, meaning S1 becomes the target. When this happens, former support becomes the resistance.
Traders use many different pivot points, but they agree that these are commonly used as leading indicators in technical analyses.
Whatever pivot point formula you have chosen, they all have the same trading philosophy. Pivots may indicate unexpected simultaneous influxes on the market, which lead to opportunities or breakouts. They may be used for calculations for any time frame trading.
It is essential to remember that although pivot points are a valuable tool for trading various financial instruments, they are just predictions and probabilities, meaning they don’t always turn out to be correct.