Simply put, a pivot point and its support/resistance levels are areas at which the direction of price movement can change. The reason why pivot points are so enticing? It’s because they are OBJECTIVE. Unlike some of the other indicators we’ve already taught you about, there’s no discretion involved. In many ways, forex pivot points are very similar to Fibonacci levels. Because so many look at those levels, they almost become self-fulfilling. The significant difference between the two is that with Fibonacci, there is still some subjectivity involved in picking Swing Highs and Swing Lows. With pivot points, forex traders typically use the same method for calculating them. Many traders monitor these levels, and you should, too.
The simplest way to use pivot point levels in your forex trading is like your regular support and resistance levels. Like good ole support and resistance, the price will repeatedly test the levels. The more times a currency pair touches a pivot level and reverses, the stronger the level. “pivoting” means reaching a support or resistance level and then reversing. If you see that a pivot level is holding, this could give you some good trading opportunities. If the price is nearing the upper resistance level, you could SELL the pair and place a stop just above the resistance. If the price is nearing a support level, you could BUY and put your stop just below the level.
Pivot points can be used by range, breakout, and trend traders. Range-bound forex traders will enter a buy order near identified levels of support and a sell order when the pair nears resistance. Pivot points also allow breakout forex traders to identify key levels that need to be broken for a move to qualify as a strong momentum move. Sentiment (or trend) forex traders use pivot points to help determine the bullishness or bearishness of a currency pair. The simplicity of pivot points makes them a helpful tool to add to your trading toolbox. It allows you to see possible areas likely to cause price movement. You’ll become more in sync with market movements and make better trading decisions. Using pivot point analysis alone is not always enough. Learn to use pivot points and other technical analysis tools such as candlestick patterns, MACD crossover, moving averages crossovers, the stochastic, RSI, etc. The greater the confirmation, the greater your probability of a successful trade!
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