Pivot Point methodology is one of the most popular and widely used technical analysis tools used by traders in Forex trading. It is a powerful tool that helps traders to identify potential support and resistance levels in the market. Pivot points are calculated using the previous day’s high, low, and close prices. By using these pivot points, traders can make informed decisions about when to enter or exit a trade.
The concept of pivot points was first developed by floor traders in the stock market who needed an easy way to identify potential turning points in the market. Over time, this concept has been adapted for use in Forex trading as well. In this article, we will discuss how one can effectively apply pivot point methodology in forex trading.
The first step to effectively applying pivot point methodology is to understand how it works and what types of signals it provides. Pivot points are calculated using the previous day’s high, low, and close prices. These values are then used to calculate three different levels: a central pivot point (PP), two support levels (S1 & S2), and two resistance levels (R1 & R2). The PP level is considered to be the most important level as it indicates where price action may reverse direction during intraday trading sessions.
Once you have identified these levels on your chart, you can then look for possible entry or exit signals based on price action at these levels. For example, if price action reaches a support level (S1 or S2) and then bounces back up off that level without breaking through it – this could be an indication that buyers are entering into the market at that level which could provide an opportunity for long positions if price continues higher from thereon out . Similarly if price action reaches a resistance level (R1 or R2) but fails to break through it – this could be an indication that sellers are entering into the market at that level which could provide an opportunity for short positions if price continues lower from thereon out .
In addition to providing entry/exit signals based on price action at these levels – pivot points can also be used as areas of stop loss placement when taking trades as well as targets for taking profits once those trades become profitable. This allows traders to have predetermined areas where they can manage their risk while still being able take advantage of potential opportunities presented by these technical analysis tools.
It should also be noted that while pivot point methodology does provide useful information about potential turning points in the markets – they should not be relied upon solely when making trading decisions. As with any other form of technical analysis, other indicators such as trend lines, moving averages, etc should also be taken into consideration before making any trades. Furthermore, macroeconomic factors such as interest rates, economic data releases, etc should also be taken into account when making any trading decisions. By combining all of these factors together – one can effectively apply pivot point methodology while still managing their risk appropriately within their overall strategy.