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
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)
PP = 1.2449
S1 = 1.2397
R1 = 1.2509
S2 = 1.2337
R2 = 1.2561
S3 = 1.2285
R3 = 1.2621
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.
- Look to go long with confirmation in the vicinity of S3.
- Look to go short with confirmation in the vicinity of R3.