Forex traders use a variety of indicator tools to help them with seamless trading to minimize losses. One of the most popular technical indicators day traders use today is pivot points. Pivot points indicator tool, which dates back to long before online trading, is also one of the oldest indicators.
Before becoming a favorite with forex traders among other traders, it was a favorite with stock exchange floor traders. The popularity of the indicator tool in forex day trading comes from its specialized support and resistance levels that help find market intraday turning points.
What are pivot points?
Pivot points are technical indicators used by day forex traders to identify resistance and support levels in a currency market. The tools base their calculation on the highs, lows, and closing prices of the previous day’s trading. Resistance and support levels used in conjunction with the pivot points help traders to identify stop-loss prices and potential entry and exit prices.
In day trading, a pivot point identifies two resistance and two support levels. The difference between the pivot point and the previous day’s high and low prices determines the day’s support and resistance levels. In the morning, before starting the day trading, placing the support and resistance lines takes place, and then comes the wait for the currency market to hit the entry points.
Traders use pivot points to determine the day’s market trends based on the price action direction. If the price action drops below or remains at the same level as the pivot point, it indicates a bearish market. Additionally, if the price crosses above the pivot point or remains at the same level, it indicates a bullish market.
Traders also use the pivot point trading strategy to enter or exit the currency market. They can set a stop-loss when they approach is identified resistance and support levels.
Different types of pivot points
Forex traders can use different methods to incorporate pivot points into their day trading, and the following are a few examples.
1. Standard Pivot Points
The most common pivot points that traders use for their day trading are the standard pivot points. They also go by the names classical pivot points or floor pivots. The indicator tools start with a pivot point base, a simple average of the previous day’s high, low, and close. The representation of the pivot point is a line between the two pivots of support and resistance.
2. Woodies Pivot Points
Woodies Pivot Points comprise of several key levels calculated from previous price points. They are popular with both intraday and day forex traders, and they calculate short-term support and resistance key levels. The levels include the pivot as the base and three support and resistance levels that traders use when setting trades as their guide to future price movements.
3. Camarilla Pivot Point
Versatility is important in forex trading, and the camarilla pivot point provides traders with what they need to recognize entry, and exit points, alongside key price levels. The pivot point depends on the market conditions at the trading time that dictates the best strategy to employ.
Camarilla pivot point includes four support and resistance levels, and it boasts of other closer levels compared to the other pivot point variations making it suitable for short-term trading.
4. Demark Pivot Points
Unlike other pivot point variations that emphasize more on the previous day’s price action, Demark relies on the most recent price action. Many of the traders that use this pivot point variation also incorporate TD lines that are much more objective than the standard trendlines into their actions to find support and resistance levels.
The objective of using the pivot points is to identify the most likely points prone to a breakout along the TD line. The drawing of the points is from left to right, depending on the uptrend demand points and downtrend supply points.
5. Fibonacci Pivot Points
Fibonacci pivot points, just like the standard pivot points, start from the base pivot base. Fibonacci multiples of the differences between the previous day’s highs and lows are added to make the resistance levels and then subtracted to make the support levels.
Wrapping it up
For many decades, pivot points have continued to play a huge role in identifying resistance and support levels without any bias. The trading strategy is also versatile, which opens several options for traders adding to its popularity. The basis of the trading strategy is that price will, in most cases, move relative to the previous limits unless something such as an outside cause forces it to do so.