What are Pivot Points?
In the Forex market, the pivot point is the main central price level which can show the market trend and direction along with the projected support/resistance levels.
The pivot point is found using the average of high, low, and closing price compared to the previous trading day or session.
We can use the calculated Pivot point and data to project the support and resistance levels in the future, which can be used to anticipate the price movement around these pivot points support and resistance.
Also, it is generally believed that if the price is trading above the pivot point, it indicates a bullish sentiment, while trading below the pivot point indicates a bearish sentiment.
Pivot Points Calculation
The pivot point calculation uses the data points such as the previous day's high, low, and close price. We can calculate the pivot points using only the current period or using the daily, weekly or monthly data to estimate the pivot levels on other time frames.
Formula of Pivot Point Metatrader 5
- P = (H + L + C) / 3
- R1 = P + (P − L) = 2×P − L
- S1 = P − (H − P) = 2×P − H
- R2 = P + (H − L)
- S2 = P − (H − L)
- R3 = H + 2×(P − L) = R1 + (H − L)
- S3 = L − 2×(H − P) = S1 − (H − L)
Where,
P = Central Pivot Range, H = High, L = Low, C = Close
R = Resistance
S = Support
Source:
Pivot point (technical analysis) Wikipedia
Why use this Pivot Points High Low Indicator MT4/MT5?
The Pivot point levels can be used as support/resistance to spot the reversal, continuation, stop-loss, and profit targets.
Day traders can use the daily pivot levels, swing traders can use weekly, and long-term investors can use monthly pivot levels. Positional traders and investors can use annual data to estimate significant levels for upcoming years.
Pivot Line Indicator MT4 Trading Strategies
Typically, a trader can go long when the price touches the support level and short when it touches the resistance level.
However, this commonly used strategy is dangerous during strong trending markets. Therefore, it's always best to identify the trend direction first using the moving averages.
The pivot levels can be used in a more meaningful way. If the price is below the central pivot level, the market is expected to go south and go north if the price is above the pivot level.
Any indicator or methodology cannot exist without its pitfalls. For example, pivot levels sometimes may fail you as a trader. Still, using them as a guiding compass within your trading strategy is always best.
To know more about the Pivots, read our detailed blog post - A Pivot Points Forex Trading Strategy.
Pivot Points for Range Bound Trading
Most of the time, financial markets are not trending but move in consolidation so that we can use the Pivot Point indicator for range-bound trading.
With a formation of candlestick patterns or price action near S1 S2 S3 or R1 R2 R3, we can enter a long or short trade. A moving average should be used to identify the primary trend direction for further confirmation.
The entries made around the pivot points, high or low (S3 or R3), are more accurate than those made at other pivot levels.
How Reliable are Pivot Points in Forex trading?
The pivot points are calculated using the daily, weekly, and monthly time frames. As a result, they offer one of the most accurate methods in technical analysis as the smaller time frames are full of noisy data.
The free pivot points indicator is available on the internet, but it usually needs to be better and is full of bugs, as checked by our team.
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