What are forex pivot points?
Forex pivot points are technical analysis indicators, a technique used by forex traders to locate potential support and resistance levels.
They are a tool that can help traders recognise levels, at which the direction of price movement can possibly change.
Pivot points are reference points for the market, representing an average of the high, low, and closing prices from a preceding trading period, for instance, a day or week.
They are utilized as Indicators that determine potential turning points or levels in which the sentiment of the market could change from “bullish” to “bearish” or vice versa.
Forex pivot points are remarkably useful in the forex market, especially when trading currency pairs, and are predominantly used by day traders.
Types of pivot points and their calculations
Information derived from the pivot points can be used in different ways by forex traders, which has led to the creation of various types of pivot points.
All of them basically work on the same concept of projecting price points based on an average of the high, low, and closing prices of a previous period of time, for instance, day or week.
The difference between the various types is how they are calculated.
No pivot point calculation has an edge over the others. There is no single best method. Which one to use, mainly depends on the personal preference of a forex trader.
If you are not good at maths, do not fear. Charting tool software will be available on most of the trading platforms and will automatically do the calculations for you.
However, like any other indicator, pivot points do not guarantee 100% accuracy and there is a possibility that they sometimes might not work at all.
The four main types of forex pivot points are:
- Standard Pivot Points.
- Woodie Pivot Points.
- Camarilla Pivot Points.
- Fibonacci Pivot Points.
Standard Pivot Points
Standard Pivot Points, also called Traditional Pivot Points, Floor Pivots or Classical Pivot Points, is the most common type used by forex traders.
Calculation
Start with the calculation of the Pivot Point (P).
Calculation for the Pivot Point (P): P = (High + Low + Close)/3.
The high, low, and close are the prices of the previous trading day.
The Pivot Point (P) is the mid-point from which the two support levels (S1, S2) and the two resistance levels (R1, R2) are calculated.
Calculation for the first support level (S1): S1 = (Pivot Value x 2) – High
Calculation for the first resistance level (R1): R1 = (Pivot Value x 2) – Low
Calculation for the second support level (S2): S2 = Pivot Value – (High – Low)
The second level of support will be lower than the first level of support.
Calculation for the second resistance level (R2): R2 = Pivot Value + (High – Low)
The second level of resistance will be higher than the first level of resistance.
Woodie Pivot Points
The Woodie Pivot Points calculation is different from the formula for the Standard Pivot Points. One of the main differences is that the Woodie formula puts more weight on the closing price of the previous trading day.
Calculation
Calculation for the Pivot Point (P): P = (High + Low) + (2 x Closing price)/4
Calculation for the first resistance level (R1): R1 = (Pivot Value x 2) – Low
Calculation for the first support level (S1): S1 = (Pivot Value x 2) – High
Calculation for the second support level (S2): S2 = Pivot Value – (High + Low)
Calculation for the second resistance level (R2): R2 = Pivot Value + (High – Low)
Camarilla Pivot Points
Invented by Nick Scott in the late 1980’s, Camarilla Pivot Points are quite similar to the Woodie formula, with some major exceptions, i.e., four levels of support and resistance are calculated, and a special multiplier is included in the calculation.
Calculation
Formula for the calculation, where P is the Pivot Point, S1 and S2 are support levels 1 and 2, R1 and R2 are resistance levels 1 and 2, high, low and close are the prices of the previous trading day, and 1.0833, 1.6666, 1.2500 and 1.5000 are the special multipliers.
P = (High + Close + Low)/3
S1 = Close – ((High – Low) x 1.0833)
S2 = Close – ((High – Low) x 1.1666)
S3 = Close – ((High – Low) x 1.2500)
S4 = Close – ((High – Low) x 1.5000)
R4 = Close + ((High – Low) x 1.5000)
R3 = Close + ((High – Low) x 1.2500)
R2 = Close + ((High – Low) x 1.1666)
R1 = Close + ((High – Low) x 1.0833)
Camiralla is based on the concept that markets are cyclical in nature and that the price has a natural tendency to revert back within its value range (in this instance the close of the previous day) the following day.
Therefore, the simple strategy here is to sell when the price reaches the R3 or R4 level and buy when the price drops to the S3 or S4 level.
Fibonacci Pivot Points
The Fibonacci Pivot Points formula incorporates Fibonacci levels (Fib levels), which are derived from a string of numbers, introduced to the West in the thirteenth century by the Italian mathematician, Leonardo Pisano Bogollo, also known as Fibanocci.
These strings of numbers contain unique mathematical features and ratios which are also applicable to financial markets. The most used Fib levels are 38.2%, 61.8% and 100%.
Calculation
The Pivot Point level is calculated using the standard method.
Formula for the calculation, where P is the Pivot Point, S1, S2 and S3 are support levels 1, 2 and 3, R1 R2 and R3 are resistance levels 1, 2 and 3, high, low and close are the prices of the previous trading day, and 0.382, 0.618 and 1.000 are the Lib levels used.
P = (High + Low + Close)/3
S1 = P – ((High – Low) x 0.382)
S2 = P – ((High – Low) x 0.618)
S3 = P – ((High – Low) x 1.000)
R3 = P + ((High – Low) x 1.000)
R2 = P + ((High – Low) x 0.618)
R1 = P + ((High – Low) x 0.382)
Frequently Asked Questions
How do you use pivot points in forex?
The simplest way is to use them like regular support and resistance levels. The more times that a currency pair touches a pivot level and reverse, the stronger that level is.
What are the best pivot points?
Best times for a pivot point indicator are 1-minute, 2-minute, 5-minute & 15-minute.
What are pivot points in forex trading?
Here is a list the different Pivot Points in Forex Trading Explained for Dummies
How accurate is pivot point trading?
It is highly accurate, hence the reason why many day traders use this indicator.
Does pivot point trading work?
While they work for some traders there are those that do not find it useful.
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