What are pivot points in Forex?
Any trader would like to find an indicator that allows with 100% accuracy to determine the pivot points in Forex and the limits of uptrends and downtrends. These data would be enough for profitable trading, but it is important to understand that there are no perfect indicators. All a professional can do is analyze the market and, based on their own strategy, open and close deals in a timely manner.
How to predict a pivot point in Forex
Trading systems using Forex pivot points are based on the following basic principles:
- A trend cannot last forever.
- To make a profit, you need to analyze Forex trading every day. The market is based on up/down cycles in the value of an asset, therefore the highs and lows of past prices affect quotes in the future.
- Pivot points in forex are roughly determined by mathematical formulas that take past reversal levels into account.
What types of pivot points are
The simplest formula for calculating pivot points looks like this P = (H + L + C) / 3, where P is the expected reversal point (or “pivot” for short), H is the previous day’s high, L is the lowest price, C is the closing point of the previous daily candle. By calculating the pivot value, you can roughly determine the level from which it is reasonable to start a new deal. To do this, you can apply improved versions of the formulas:
- DeMarque method.
- Woody pivot levels.
- Systems based on Fibonacci numbers.
So, Woody’s Pivot Points in Forex are calculated using the following formula:
PP = (H + L + 2C) / 4
To find the resistance closest to this mark, you need to multiply the pivot value by 2 and subtract the price low of the previous period from the resulting figure.
How to use pivot points correctly
Pivot level trading can be profitable if technical analysis is taken responsibly. The first thing a novice trader should do is open a forex account with a reliable broker. Good companies like FreshForex create a comfortable trading environment and allow clients to focus on analyzing the markets instead of solving technical problems.
The second step in pivot level trading is choosing a currency pair. Instruments with medium volatility, which are not characterized by long trends without retracement, are best suited. Reversal levels work only if the cycles of rising and falling prices change regularly.
After that, the trader needs to substitute the price values into the selected formula and calculate the nearest support or resistance level. It is recommended to place pending orders from this area. It is important to remember that forex pivot points do not always work accurately. Therefore, beginners are advised to choose the best calculation formula not according to the advice of other traders, but based on their own experience. Also, when looking for reversals, one should not get carried away and accumulate losses. If the support/resistance level is broken, you should close the unsuccessful trade and create the next order only after further analysis of the currency pair.