Pivot Point (PP) is a technical analysis indicator that helps to visually show so-called pivot levels in a chart. In its essence, it is more correct if we call it a script. It shows potential levels for trading on the charts.
Generally, technical analysis of charts of trading assets exists as an area of knowledge, precisely because the whole world, including financial ones, has its regularities. Everything is cyclical. Everything repeats itself. These circumstances allow technical analysis and its indicators to live. That is, if we know that when the price reaches a certain value, it reversed and went back, there is a possibility that when the price returns to this value it will show similar behavior. No one can control this probability, so we can never know for sure that something will happen again or not, but we should always keep it in mind. We can only make some assumptions about this probability in advance, namely:
The higher the time frame the higher this probability;
The higher the volatility + the closer the price is to the level drawn by the script, the higher the probability of market reversal;
The lower volatility + the closer price is to the level drawn by the script, the higher the probability of level breakdown, i.e. trend continuation.
Knowing these simple rules, we can already build a profitable trading system based on the PP pivot Forex indicator.
How To Use Pivots In Forex Trading
For Forex Pivot Points strategy these levels allow us to recognize a market situation and roughly evaluate possibilities, both on trend fluctuations and during a flat (border of the horizontal channel). It is admitted that so far, the price moves above the central line - the trend is bullish, if below - bearish. In the Pivot zone the possibility of a turn of the price is high, and in case of breakdown - movement at least to the following. In Forex Pivot approach S1 and R1 levels are recognized as the most significant, and other (R2, R3, S2, S3) are most often used as levels of closing of line items as in case of the price achieved by their, the market reaches a condition of an oversold or an overbought. On trend movement, the Pivot line is used as reference points for exposure of TP/SL. Hypothetically, the trend has to turn on the third step (S3 or R3), but even in case of the extreme volatility of the market, the price is unlikely to reach these levels. Most often the reversal occurs in the area of the S2-R2 levels - this is where it is possible to fix profit partially. There are adjustments of the Pivot Point indicator which allow displaying on one schedule levels of several periods, for example, H4, D1, W1. Then, according to Pivot strategy Forex, on the smaller time frame, it is possible to look for points of entry in the market and to use levels from the higher time frame as a reference point.
Pivot Point Indicator
Today most of the trading terminals have built-in indicators, if not you can find a lot of them online. Just browse the net and simply add it to your platform. Once you have done this, you can implement the pivot point indicator right on your chart. When you place your pivot point indicator on your chart, you should see something like this:
The horizontal lines on the chart are the pivot points. The blue line is the central pivot point. The lines above the principal pivot point are R1, R2, and R3. The lines below the blue line are S1, S2, and S3, (S2 and S3 are not visible). We also put three vertical lines on the chart. These three lines divide the distinct trading days. Pay attention that the pivot levels of each day are drawn individually. This is so because each trading day has different daily high, low and close values. In such a way, the pivot levels are different too. Hence, we see a rapid switch in the levels of the pivot lines for every trading day.
Pivot Points Trading Strategies
#1 Pivot Point Bounce Strategy The pivot point bounce is a classic trading approach. The idea is that if the price is above the PP, the market is bullish. If the price is below the PP, it is another way around. The pivot point bounce takes advantage of market sentiment, longing or shorting if price returns back to the PP (which is historically good horizontal support or resistance level).
#2 Pivot Point Trend Trading Strategy You can also use pivot points and the various support and resistance levels calculated from them for trend trading. The point here is to take advantage of retracements at important levels after the price has picked a course based on the PP. If price breaks through the first support or resistance level persuasive, and then backtracks, you can buy or sell the bounce off of that resistance level.
#3 Pivot Point Reversal Strategy PP support and resistance levels can also be good areas to place reversal trades. If the price seems to slow down near the second or third support or resistance levels, these could be the time to buy or sell accordingly – particularly if these levels line up with a former market structure. The logic behind it goes like this - at support or resistance levels 1 and 2, price is likely to be prolonged. Considering these levels are also typically good horizontal support and resistance levels they are great areas to look for reversal positions.
Remember, in Forex there are no indicators that are always right, Pivot Points, like any other, requires confirmation of its signals. When building your trading system, it is better to use several indicators.
Follow Money Management rules, never risk more than 2 percent of your capital in one position. This approach will protect you from huge losses and will allow you to make stable earnings in Forex using Pivot Points in Forex trading