The Pivot Point strategy is a popular forex trading method used to decide on entry and exit points. It is based on the concept of support, resistance, and price channeling. The pivot point formula works by analyzing previous highs or lows for their ability to act as support or resistance in future prices, hence the name ‘pivot point’.
What is a Pivot Point?
A pivot point is a price level that is key to market psychology. It can be used as a very effective tool for forex trading. The pivot point strategy was created by floor traders who cut pieces of paper and placed them under the lowest lows of an existing trend line to provide resistance or below significant highs to provide support. In the case of the former, once price breaks beneath those support points, those levels hold no more weight. They have been “pivoted from” and therefore cannot be counted on for future support. The same rule applies to resistance levels on upside moves.
The Pivot Point strategy is a great way to help swing traders capture more significant moves with less risk necessary to have an overall profitable trading session. Three pivots are generally enough to create a clean chart that investors can use as a reference in the future when making their decisions. Just remember to always wait for the Price Action based Pivot Point to hold as support or resistance before initiating your trade.
Step 1 – Calculating the Highest High/Low
To calculate the highest high of a given time frame, you take all of that time frame’s daily highs and add them together. For example, if today were January 1st, then the first high that day would be added to yesterday’s first high, yesterday’s second high until you reach either December 31st’s last high or January 1st’s first high (whichever comes first). You would then add all of those values together, which is the highest high for that time frame.
Step 2 – Calculating the Lowest Low/High
The lowest low is calculated similarly to the highest high; by adding up consecutive lows. This means if today was January 1st and we were calculating the lowest low for this month, today’s low would be added to yesterday’s lowest low until either tomorrow’s high or January 31st’s lowest low was reached (whichever comes last). Once you have found the sum of all these lows, you will add one to it and divide it by two.
Step 3 – Plotting your Pivot Points
Once you have these values, you are ready to plot your pivot points. The formula for the daily pivot point is: P = (H + L + 2C) / 3
Where H is today’s highest high, L is today’s lowest low, and C is yesterday’s closing price. Similarly, you would replace the period number with whichever time frame you are calculating for any other time frame.
Step 4 – Recasting future prices.
The next step in trading using the pivot point strategy involves forecasting future prices based on past pivot points. If a pivot point acts as a strong support level in future, the market will not break below it when tested; this can be used for long entry opportunities. If a pivot point acts as an area of resistance in future prices, the market will not go above it when tested; this can be used for short entry opportunities.
Summary
Pivot points are tools that forex traders use to determine their trading strategies. The pivot point strategy is simple yet effective because each variable has been calculated using the actual trading price data for that time frame. Because of this, pivot points are more realistic than other forms of support/resistance levels, which typically only consider previous closing prices or opening prices which gaps and large orders can often distort; these tangibles make pivots much more reliable in forecasting future prices. New traders interested in forex albania should use a reputable online broker from Saxo Bank.
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