Learn How To Trade Pivot Points (PP) In Forex

Learn How To Trade Pivot Points (PP) In Forex

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Written by Peter Bosmans

A Pivot Point (PP) is referred to as a predictive technical analysis tool that is widely used among forex traders. The main purpose of Pivot Point trading is to try to predict the future direction of a currency pair.

Pivot Points are composed of the pivot point (PP) itself and it's support (S1, S2, S3) - and resistance levels (R1, R2, R3). GBP/USD 5 Min Pivot Point Chart

Calculating Pivot Points and it's Support/Resistance levels

H: Previous daily high price
L: Previous daily low price
C: Previous daily close price

Calculations:

Pivot Point (PP) = (H+L+C) / 3.
Support1 (S1) = 2×P − H
Resistance1 (R1) = 2×P − L

Support2 (S2) = P − (H − L)
Resistance2 (R2) = P + (H − L)

Support3 (S3) = P − 2×(H − L)
Resistance3 (R3) = P + 2×(H − L)

Example:

H: 1.2500
L: 1.2388
C: 1.2458

PP = 1.2449
S1 = 1.2397
R1 = 1.2509
S2 = 1.2337
R2 = 1.2561
S3 = 1.2285
R3 = 1.2621

Forex Pivot Point Tools

A. Pivot Point calculator - calculates all levels for you on autopilot
B. Daily Pivot Points automatically updated on a daily basis
C. Pivot Point indicator for Metatrader 4 users (free download)

Pivot Point Forex Trading Assumptions

• Price is bullish when trading above the pivot point.
• Price is bearish when trading below the pivot point.
• S1, S2 and S3 are important levels of support.
• R1, R2 and R3 are important levels of resistance.
• S1-PP-R1 trading range: Normal
• S2- PP - R2 trading range: Oversold / Overbought
• S3- PP - R3 trading range: Extremely oversold / Extremely overbought

Type of technical indicator: Leading Indicator

Forex signals from Pivot Points

There are various ways in which you can use Pivot Points in forex trading. Here are some ideas how you can benefit from them.

In Trending Markets

In up trending markets, look to go long with confirmation just above the Pivot Point.

In down trending markets, look to go short with confirmation just below the Pivot Point.

In Sideways Markets

Look to go long with confirmation in the vicinity of S1, S2 or S3.

Look to go short with confirmation in the vicinity of R1, R2 or R3.

Trend Reversals

Look to go long with confirmation in the vicinity of S3.

Look to go short with confirmation in the vicinity of R3.

Forex Pivot Point Trading Example

A double top appears in the GBP/USD 15 min chart near R1 and then price falls back. We want to go short GBP/USD but we first need to confirm the trade in order to increase the odds in our favor. Confirmation:The rising trend line breaks (see chart). We go short at the candle's close with stop loss 3 pips above the double top. Total trading risk = 32 pips.