Pivot point forex is a trading technique that uses a set of mathematical formulas to determine the potential levels of support and resistance in the market. These levels are based on the previous day’s high, low, and close prices, and can be used to predict the possible direction and range of the price movement for the current day.
Using pivot point forex as a trading strategy has many benefits, such as:
- It is simple and easy to understand and apply, even for beginners
- It is objective and consistent, as it does not rely on subjective opinions or emotions
- It is versatile and adaptable, as it can be used for different time frames, markets, and trading styles
- It is effective and reliable, as it has been proven to work by many traders over time
In this blog post, we will show you how to use pivot point forex to identify support and resistance levels, enter and exit trades, and manage risk and reward. By the end of this post, you will have a clear understanding of how to use pivot point forex as a simple but effective trading strategy for beginners. Let’s get started!
How to Use Pivot Point Forex to Identify Support and Resistance Levels
Support and resistance levels are the key points on the price chart where the price tends to bounce back or break through. They indicate the supply and demand of the market, as well as the psychological barriers of the traders. Support and resistance levels are important for trading because they can help traders to identify the trend, the range, the entry and exit points, and the risk and reward potential of a trade.
To use pivot point forex to find the support and resistance levels, we need to use the following formulas:
- Pivot point (PP) = (High + Low + Close) / 3
- First resistance (R1) = (2 x PP) – Low
- First support (S1) = (2 x PP) – High
- Second resistance (R2) = PP + (High – Low)
- Second support (S2) = PP – (High – Low)
- Third resistance (R3) = High + 2 x (PP – Low)
- Third support (S3) = Low – 2 x (High – PP)
These formulas can be applied to any time frame, such as daily, weekly, or monthly. For example, to find the daily pivot point and support and resistance levels, we need to use the previous day’s high, low, and close prices. To find the weekly pivot point and support and resistance levels, we need to use the previous week’s high, low, and close prices. And so on.
Here are some examples and charts to illustrate how to use pivot point forex to identify support and resistance levels:
- Example 1: Daily pivot point forex for EUR/USD on April 12, 2023
- High = 1.1945
- Low = 1.1865
- Close = 1.1910
- PP = (1.1945 + 1.1865 + 1.1910) / 3 = 1.1907
- R1 = (2 x 1.1907) – 1.1865 = 1.1949
- S1 = (2 x 1.1907) – 1.1945 = 1.1869
- R2 = 1.1907 + (1.1945 – 1.1865) = 1.1987
- S2 = 1.1907 – (1.1945 – 1.1865) = 1.1827
- R3 = 1.1945 + 2 x (1.1907 – 1.1865) = 1.2033
- S3 = 1.1865 – 2 x (1.1945 – 1.1907) = 1.1781
The following chart shows the daily pivot point forex for EUR/USD on April 12, 2023:
As we can see from the chart, the price tested the R1 level several times before breaking above it and reaching the R2 level. The price then retraced back to the R1 level, which acted as a support level, before bouncing back up to the R2 level again.
- Example 2: Weekly pivot point forex for GBP/JPY on April 10-14, 2023
- High = 153.65
- Low = 150.25
- Close = 152.10
- PP = (153.65 + 150.25 + 152.10) / 3 = 152
- R1 = (2 x 152) – 150.25 = 153.75
- S1 = (2 x 152) – 153.65 = 150.35
- R2 = 152 + (153.65 – 150.25) = 155.4
- S2 = 152 – (153.65 -150 .25) =148 .6
- R3 =153 .65 +2 x(152-150 .25 )=157 .15
- S3=150 .25-2 x(153 .65-152 )=146 .85
The following chart shows the weekly pivot point forex for GBP/JPY on April10-14 ,2023:
As we can see from the chart, the price opened below the PP level and moved down to test the S1 level before reversing up to break above the PP level and reach the R1 level.The price then consolidated between the PP and R1 levels for most ofthe week before breaking above the R1 level and reachingthe R2 level on Friday. The price then closed below the R2 level, indicating a possible pullback.
How to Use Pivot Point Forex to Enter and Exit Trades
To use pivot point forex to enter and exit trades, we need to follow some basic rules based on the type of signal we receive from the pivot point forex levels. There are three main types of signals: bounce, breakout, and reversal signals.
- Bounce signals occur when the price bounces off a pivot point forex level and continues in the direction of the previous trend. For example, if the price is in an uptrend and bounces off a support level, or if the price is in a downtrend and bounces off a resistance level, we can consider these as bounce signals. To enter a trade based on a bounce signal, we can buy at the support level or sell at the resistance level, and place our stop-loss below the support level or above the resistance level. To exit a trade based on a bounce signal, we can take profit at the next pivot point forex level or use a trailing stop to lock in profits.
- Breakout signals occur when the price breaks through a pivot point forex level and starts a new trend. For example, if the price breaks above a resistance level or below a support level, we can consider these as breakout signals. To enter a trade based on a breakout signal, we can buy at the break of the resistance level or sell at the break of the support level, and place our stop-loss below the resistance level or above the support level. To exit a trade based on a breakout signal, we can take profit at the next pivot point forex level or use a trailing stop to lock in profits.
- Reversal signals occur when the price reverses its direction at a pivot point forex level and starts a new trend. For example, if the price is in an uptrend and reverses at a resistance level, or if the price is in a downtrend and reverses at a support level, we can consider these as reversal signals. To enter a trade based on a reversal signal, we can sell at the resistance level or buy at the support level, and place our stop-loss above the resistance level or below the support level. To exit a trade based on a reversal signal, we can take profit at the next pivot point forex level or use a trailing stop to lock in profits.
Here are some examples and charts to demonstrate how to use pivot point forex to enter and exit trades:
- Example 1: Bounce signal for EUR/USD on April 12, 2023
The following chart shows a bounce signal for EUR/USD on April 12, 2023:
As we can see from the chart, the price was in an uptrend and bounced off the R1 level at 1.1949. We could have entered a long position at this level and placed our stop-loss below the R1 level at 1.1940. We could have exited our trade at the R2 level at 1.1987 or used a trailing stop to lock in profits. - Example 2: Breakout signal for GBP/JPY on April 14, 2023
The following chart shows a breakout signal for GBP/JPY on April 14, 2023:
As we can see from the chart, the price broke above the R1 level at 153.75 and started a new uptrend. We could have entered a long position at this level and placed our stop-loss below the R1 level at 153.65. We could have exited our trade at the R2 level at 155.4 or used a trailing stop to lock in profits. - Example 3: Reversal signal for USD/CAD on April 13, 2023
The following chart shows a reversal signal for USD/CAD on April 13, 2023:
As we can see from the chart, the price was in an uptrend and reversed at the R2 level at 1.2645. We could have entered a short position at this level and placed our stop-loss above the R2 level at 1.2650. We could have exited our trade at the PP level at 1.2590 or used a trailing stop to lock in profits.
How to Use Pivot Point Forex to Manage Risk and Reward
Managing risk and reward is one of the most important aspects of trading, as it determines the profitability and sustainability of a trader. Risk and reward refers to the amount of money that a trader is willing to lose or gain on a trade, and the ratio between them. A good risk-reward ratio means that the potential reward is higher than the potential risk, and vice versa.
To use pivot point forex to manage risk and reward, we need to use the pivot point forex levels to set our stop-loss and take-profit levels. A stop-loss level is the price at which we exit a trade if it goes against us, to limit our losses. A take-profit level is the price at which we exit a trade if it goes in our favor, to secure our profits.
The general rule of thumb is to set our stop-loss level below the support level or above the resistance level, depending on whether we are buying or selling. Similarly, we can set our take-profit level at the next pivot point forex level or use a trailing stop to lock in profits.
For example, if we buy EUR/USD at the R1 level at 1.1949, we can set our stop-loss level below the R1 level at 1.1940, and our take-profit level at the R2 level at 1.1987. This way, we are risking 9 pips to gain 38 pips, which gives us a risk-reward ratio of 1:4.2.
Some tips and tricks to optimize the risk-reward ratio using pivot point forex are:
- Use a higher time frame, such as weekly or monthly, to find more reliable pivot point forex levels and signals
- Use other technical indicators and chart patterns to confirm the pivot point forex signals and levels
- Use a smaller lot size or leverage to reduce the risk per trade
- Use a trailing stop to capture more profits in a trending market
- Use a breakeven stop to protect your capital in a ranging market
- Use a multiple-entry or exit strategy to scale in or out of your trades
- Use a backtesting or demo account to test your pivot point forex strategy before using it on a live account
Conclusion
In this blog post, we have learned how to use pivot point forex as a simple but effective trading strategy for beginners. We have covered the following topics:
- What is pivot point forex and how it is calculated
- How to use pivot point forex to identify support and resistance levels
- How to use pivot point forex to enter and exit trades based on bounce, breakout, and reversal signals
- How to use pivot point forex to manage risk and reward using stop-loss and take-profit levels
Using pivot point forex as a trading strategy has many advantages, such as:
- It is simple and easy to understand and apply, even for beginners
- It is objective and consistent, as it does not rely on subjective opinions or emotions
- It is versatile and adaptable, as it can be used for different time frames, markets, and trading styles
- It is effective and reliable, as it has been proven to work by many traders over time
We hope you enjoyed this blog post and found it useful. Happy trading!
