Pivot point trading strategy in forex is a technical analysis method for forecasting pivot points and day trading. Pivot Points can be used as a standalone system or as a confirmation tool to support other methods.
Pivot points are price projections that reflect the balance of probabilities, but not certainty, at any given time. Although it may have not been scientifically proven that Pivot Points are an accurate predictor of future price action, historical price action has demonstrated the value of these support and resistance levels.
Pivot points in forex trading are used to identify entry and exit points for day traders.
The pivot point formula is designed to calculate numerical values at significant market turning points, i.e., at potential support and resistance levels, which can then be used by traders to enter or exit their trades with greater accuracy.
Pivot point trading strategy in forex is a very reliable method for determining the overall market trend direction. It becomes more accurate when combined with other methods such as candlestick pattern formations and Fibonacci retracement levels.
Pivot life cycle is broken into four sections; the first is the Pivot Point, which is derived from market data, then Resistance and Support Levels are next, followed by Trading Ranges (TR) or Zones (Z),
and finally, the Ultimate high or low price. The TR/Z section of pivot life cycle is also known as the Time and Sales area.
The various pivot point levels consist of three components, which are measured from market open to market close on either a daily or weekly chart. Traditionally, the pivot point is simply the average of the high, low and close of the session.
The pivot point is calculated using the following formula:
Resistance Levels are formed based upon session highs, whereas Support levels are determined on session lows. These levels are then projected outward by a certain number of standard deviations away from the pivot point. Pivot Point trading strategy in forex use the following formula to achieve this:
The number of Standard Deviations is based upon market volatility, e.g., more volatile markets require greater standard deviations before pivot points are projected outward. Traders can calculate these levels using a variety of charting tools or online calculators such as this one for MetaTrader4.
The Use of Highs and Lows can be replaced by Measuring from a Median Price Line, meaning the 50% retracement is used instead of the Open/Close. In order to calculate pivot lines using median price lines rather than market open-high-low-close levels.