How to Use Pivot Points in Forex Trading in 2022?

In the past, being a trader meant that you were in for a very risky and delicate job.

However, years of trading have brought investors to figure out a few ways to minimize the risks and increase profit. One of these frequently used techniques in forex that changed the concept is pivot points.

This method gives an objective view of the turning points in the market, allowing investors to direct their trading accordingly.

If you want to use pivot points to their full potential, you should know a few tricks. The following tips could help whether you are a beginner or have knowledge of the topic.

📌 What Are Pivot Points?

Pivot points in forex are technical analysis indicators that present the average of an asset’s closing price and the high and low, but all from the previous day. The points are used to see in which direction the market will follow, i.e., what trend it will take in a set period.

This technique is used to find the support and resistance levels which can help determine whether the market will act bearish or bullish.

However, before you dive into learning about pivot points and how to use them, ensure you find the right broker for your needs. This way, your trading journey will have a solid basis to build upon.

📌 Support and Resistance Levels

These levels are alarming the traders to be careful about their next step in trading.

The support level shows that a certain market is about to accelerate, i.e., they show the point where buyers are more likely to enter the market. On the other hand, resistance levels indicate that too many sellers want to sell at that price, meaning the price can’t go up, so the market will start to go down.

Essentially, these two lines are where the price moves. Once a trend hits the support or the resistance level, you can expect a movement in the price.

📌 Forms of Pivot Points

You can use different types of pivot points to indicate the levels. Each has a different calculation, but they serve the same purpose.

The following are the most frequent ones.

1. Standard Pivot Points / The 5 Point System

This is the most basic calculation for pivot points. The simple calculation is as follows:

PP = (High + Low + Close) / 3

Once you have calculated the pivot points, the support and resistance levels can be created to form a line.

2. Fibonacci Pivot Points

Fibonacci pivot points work by connecting two points that you deem important. It commonly follows a percentage level of 23.6%, 38.2%, 50.0%, 61.8% and 78.6%. The percentages represent an area where shifts might occur, as the analysis suggests that these percentages are where a market either lifts or falls.

The Fibonacci method is mostly used for technical analysis, as it can identify the support and resistance lines for the most benefit.

3. DeMark Pivot Points

Tom Demark – a forex trader, introduced this method. Unlike other forex pivot points, this one doesn’t base its calculations on the previous day but on the most recent data.

It uses a specific number to calculate the support and resistance levels and emphasize price movements. Another interesting thing is that the lines here are not drawn as the traditional left-to-right movement but take the other way – right-to-left.

📌 Reading Pivot Points

After the base, pivot points are set, and support and resistance levels are drawn, the next thing is to read or use the pivot points.

First, we can use the base point to evaluate the market’s direction. If the present value is above the base point, it hints at an uplift, known as a bullish trend. If it’s lower, it hints at a slowdown or a bearish trend.

This is where the support and resistance lines come in handy. When you notice the market gets closer to the resistance level, it’s best to close long positions. As it gets closer to the support level, you close short positions.

Another alternative is to use these levels to indicate when to open a new trading session – for both short and long positions.

📌 Bottom Line

The calculations to pin pivot points are rarely done manually. Nonetheless, the method chosen to calculate them will lead to the same requested results.

Pivot points are essential in predicting and analyzing, so knowing them is crucial when trading on forex.

It is important to notice that the pivot points are just suggestions and probabilities of what might happen to the market. So note that as reliable as they might be, there is always a small hint of indecisiveness.

Still, using pivot points to minimize the risk factor is always important, as the main goal in trading is to turn out investments into profits.