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Home » What Is Pivot Point Indicator and How to Use It in Forex?

What Is Pivot Point Indicator and How to Use It in Forex?

What Is Pivot Point Indicator

The history of pivot point dates back to floor traders on stock exchanges. They used the prices from the previous day to calculate when the price might pivot on the following day. The method gained some recognition and entered other markets, one of which is Forex.

If you want to use this indicator to notice important levels throughout the trading day, read on for more info!

What Is Pivot Point Indicator

Pivot Points Indicator: Definition, Purpose, Examples

What is pivot point? It is an indicator that calculates the areas at which the price movement can possibly change – i.e., support and resistance levels. The readings from pivot points help traders determine the overall trend of the market and predict when the current trend might change. 

Another way of looking at pivot points has to do with market bias. So, pivots can also help traders assess whether the trading session has an upward or downward bias. In the first case, it means that the price is above the average, so traders have taken a bias that the trend is up and look for opportunities to buy. In the opposite scenario, the price is below the average, so traders a looking to sell the asset. 

For example, if the price rises above the pivot point, traders can go long early in the session. The levels can also be used as target prices or stop-loss levels.

How to Calculate Pivots?

Calculations are based on the last trading session’s open, high, low, and close. Because Forex is a 24/5 market and the highest amount of trading volume takes place in New York, many use 5 p.m. EST as the previous day’s close.

The formula looks like this:

  • 1st resistance = (2*PP)–Lo
  • 2nd resistance = PP+(Hi–Lo)
  • 3rd resistance = Hi+2*(PP–Lo)
  • Pivot point = (Hi+Lo+Close)/3
  • 1st support = (2*PP)–Hi
  • 2nd support = PP–(Hi–Lo)
  • 3rd support = Lo–2*(Hi–PP)

If you’re not particularly good with numbers and calculations, you can use online pivot calculators. Most charting software can also do this for you. 

Types of Pivot Points

So far, we’ve only talked about the traditional pivots. But learning about the other types can also be helpful, even if you stick to the standard. 

The only difference is the calculation of the pivot point levels. The strategies we’ll cover in the next section apply to all these types in the same manner. 

Standard Pivot Points

This type uses the formula from the previous sections and consists of a pivot point level, three support, and three resistance levels.

Fibonacci Pivot Points 

These pivot points also use the base formula but with Fibonacci ratios:

  • R3 = PP+((Hi–Lo)*1.000)
  • R2 = PP+((Hi–Lo)*0.618)
  • R1 = PP+((Hi–Lo)*0.382)
  • PP = (Hi+Lo+Close)/3
  • S1 = PP–((Hi–Lo)*0.382)
  • S2 = PP–((Hi–Lo)*0.618)
  • S3 = PP–((Hi–Lo)*1.000)

Woodie Pivot Points

Here, the calculation is made for four levels instead of six:

  • R2 = PP+Hi–Lo
  • R1 = (2*PP)–Lo
  • PP = (Hi+Lo+2*Close)/4
  • S1 = (2*PP)–Hi
  • S2 = PP–Hi+Lo

Camarilla Pivot Points

This formula calculates for eight major levels:

  • R4 = Close+((Hi–Lo)*1.5000)
  • R3 = Close+((Hi–Lo)*1.2500)
  • R2 = Close+((Hi–Lo)*1.1666)
  • R1 = Close+((Hi–Lo)*1.0833)
  • PP = (Hi+Lo+Close)/3
  • S1 = Close–((Hi–Lo)*1.0833)
  • S2 = Close–((Hi–Lo)*1.1666)
  • S3 = Close–((Hi–Lo)*1.2500)
  • S4 = Close–((Hi–Lo)*1.5000)

DeMark Pivot Points

This formula depends on where the close of the market is:

  • If Close is lower than Open, then X = Hi+2*Lo+Close
  • If Close is higher Open, then X = 2*Hi+Lo+Close
  • If Close is the same as Open, then X = Hi+Lo+2*Close
  • New High = X/2–Lo
  • New Low = X/2–Hi

Pivot Point Strategies for Forex Traders

The position of pivot points can help assess the volume of trading. For example, when the price is at the pivot point or near it, it means the current volume is high. 

There are also two strategies that are based on the position of the price line with respect to the pivot: 

  • Bounce – If the price bounces before reaching the pivot level, it’s a signal to enter a long trade in the same direction as the bounce. In the case of a downward bounce, it’s a signal to sell the currency pair.
  • Breakout – If the price breaks through the pivot, it’s a signal to open a trade in the direction of the breakout. Depending on whether the breakout is bullish or bearish, you’ll decide whether the trade should be long or short. 

Of course, a lot more can be said about pivot points. But at the end of the day, the best way to learn about new indicators is to practice with them.