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Best way of using Forex pivot point indicator in trading - Dailyforextrading.net

Best way of using Forex pivot point indicator in trading - Dailyforextrading.net

One of the essential things in successful trading is the ability to identify the key support and resistance levels and determine the pivotal points where the overall trend is likely to reverse. A good way to calculate important psychological levels is the Pivot Points indicator.

Depending on the method of plotting pivot points specified in the settings, the indicator automatically draws several support and resistance levels at High (Max), Low (Min), and Close prices. Read on, and you will learn the pivot point definition, Pivot Points indicator, the principle of plotting pivot points, and the trading systems based on the Pivot Points indicator.

What are pivot points?

What is a pivot point? First, let us define pivot point. Pivot is a French borrowing that slowly evolved grammatically in English, which literary means “a turn.”

Pivot points are the reversal points or levels where the price rebounds and starts moving in the opposite direction. Differently put, Pivot is the level where the bullish trend will turn bearish and vice versa.

The indicator will be of use for a trader who:

  • Determines entry and exit points according to the support and resistance levels.
  • Chooses the method to calculate the length of stop loss and take profit.
  • Uses trading strategies within a trading range.

The principles of drawing Forex levels according to highs and lows are subjective. However, if you use horizontal levels built according to a specific mathematical formula, you will get a tool with a clear-cut interpretation. These are Pivot lines.

Types of Pivot Points

The classic formula for plotting stock pivot points involves using pivot points trading strategy based on the average of three types of prices — candlestick highs, lows, and closing prices. The difference between other pivot point formulas and the classic one is in the number of lines drawn, the use of additional correction factors, weighting factors.

1. Classic calculation formula: Six horizontal lines are calculated: three resistance levels (R1-R3) and three pivot support levels (S1-S3). The calculation formula of the central stock Pivot point is the arithmetic mean of three types of prices.

Pivot = (Max + Min + Close)/3

R1 = Pivot + (Pivot - Min)

R2 = Pivot + (Max - Min)

R3 = Max + 2*(Pivot - Min)

S1 = Pivot - (Max - Pivot)

S2 = Pivot - (Max - Min)

S3 = Min - 2*(Max - Pivot)

Max and Min are actually high and actual low; Close is the closing price.

2. Fibonacci. Fibonacci ratios are used to calculate the levels of deviation from the classic (floor) Pivot point. The calculation formula of the floor pivot line is the same as the classic one.

Pivot = (Max + Min + Close)/3

R1 = Pivot + (R*0,382)

R2 = Pivot + (R*0,618)

R3 = Pivot + (R*1,00)

R4 = Pivot + (R*1,618)

S1 = Pivot - (R*0,382)

S2 = Pivot - (R*0,618)

S3 = Pivot - (R*1,00)

S4 = Pivot - (R*1,618)

R = Max - Min

3. The Camarilla pivot point. The formula includes four support and four resistance levels without the basic pivot point. Ratios are included in the calculation, due to which the price contacts the levels more often. Therefore, Camarilla is often recommended for scalping and short-term trading.

R1 = (Max - Min)*1,1/12 + Close

R2 = (Max - Min)*1,1/6 + Close

R3 = (Max - Min)*1,1/4 + Close

R4 = (Max - Min)*1,1/2 + Close

S1 = Close - (Max - Min)*1,1/12

S2 = Close - (Max - Min)*1,1/6

S3 = Close - (Max - Min)*1,1/4

S4 = Close - (Max - Min)*1,1/2

4. Woodie’s pivot points. The calculation formula is similar to the standard pivot points. However, standard calculators use four levels instead of six. Besides, the calculation for Woodie’s pivot points differs from other pivots because it places a greater weighting on recent price data than other variations.

Pivot = (Max + Min + 2*Close)/4

R1 = Pivot + (Pivot - Min)

R2 = Pivot + (Max - Min)

S1 = Pivot - (Max - Pivot)

S2 = Pivot - (Max - Min)

5. DeMark Pivot points. Demark pivots compute only the upper resistance level and the lower support line. The approach to what is pivot point and the calculation of the base level is also different.

If Close is less than Open, Pivot = Max + 2*Min + Close

If Close is greater than Open, Pivot = 2*Max + Min + Close

If Close = Open, Pivot = Max + Min + 2*Close

S1 = Pivot/2 - Min

R1 = Pivot/2 + Max

Using pivot points in Forex trading

The Pivot Points indicator builds the following horizontal levels:

  • P (PP) – the Pivot level
  • S – the Support level
  • R – the Resistance level

The ideal market situation is considered to be when the candlestick opens below the P points, the price rises, slows down a little at the R1 point, gradually reaches the R2 point, and reverses.

The strategy of pivot points trading is based on the idea that the price tends to return to the previous day's close more often than to go beyond the previous range.

Therefore, it is recommended to enter the D1 timeframe in the indicator settings. This means that the levels for the next day will be calculated based on the previous closed daily candlestick.

It is clear from the screenshot that the daily timeframe is in the indicator settings, the chart timeframe is H1. It means that the indicator will draw new horizontal levels every 24 hours.

If you set the H4 in the chart, the levels will be updated every six hours; if you choose the D1 timeframe in the chart, the levels won’t be drawn.

The signals of the Pivot Point indicator:

  • The price recent swing is between the R1 and S1 points, and the market crosses the Pivot point in both directions several times. This signals that the market is trading flat.

  • The price breaks out points S3 or R3 - there is a strong downtrend or uptrend in the market.

  • In the uptrend, the price, following a correction, runs into resistance R and breaks it out upside. This is a signal of the trend continuation, and one could enter along. It is relevant to enter a short in the situation when the price breaks out the support level S in a downtrend.

An example of a trading strategy according to the Pivot Points.

1 – The first rising green candlestick almost reaches the P level, the second rising candlestick closes higher than P. It is too early to suggest a trend, as the price hasn’t broken out at the R1 level.

2 – The price rebounds and breaks out the support level S1. One could enter along with a take profit at S2. The Price breaks out S2 and corrects towards S1. Expect a signal, as the uptrend could continue.

3 – There appears a pin bar. It is a reversal pattern, so one could enter a short trade. Take profit is S2 and S1.

4 – There appears a candlestick looking like a pin bar and a Doji. It is time to be ready to open a long position with a take profit at S1 or S2.

5 – new reversal down after the price touches the horizontal level.

6 – new reversal up after the price touches the level. Continue reading with Litefinance.com...


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