Professional forex traders and market makers use pivot points to identify potential support and resistance levels.
Simply put, a pivot point and its support/resistance levels are areas at which the direction of price movement can possibly change.
The reason why pivot points are so enticing?
It’s because they are OBJECTIVE.
Unlike some of the other indicators that we’ve taught you about already, there’s no discretion involved.
In many ways, forex pivot points are very similar to Fibonacci levels. Because so many people are looking at those levels, they almost become self-fulfilling.
The major 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 keep an eye on these levels and you should too.
Pivot points are especially useful to short-term traders who are looking to take advantage of small price movements.
Just like normal support and resistance levels, forex traders can choose to trade the bounce or the break of these levels.
Range-bound traders use pivot points to identify reversal points. They see pivot points as areas where they can place their buy or sell orders.
Breakout forex traders use pivot points to recognize key levels that need to be broken for a move to be classified as a real deal breakout.
Here is an example of pivot points plotted on a 1-hour EUR/USD chart:
As you can see here, horizontal support and resistance levels are placed on your chart. And look – they’re marked out nicely for you! How convenient is that?!
Pivot Point Lingo
Here’s quick rundown on what those acronyms mean:
PP stands for Pivot Point.
S stands for Support.
R stands for Resistance.
But don’t get too caught up in thinking “S1 has to be support” or “R1 has to be resistance.” We’ll explain why later.
In the following lessons, you will learn how to calculate forex pivot points, the different types of pivot points and most importantly, how you can add pivot points to your forex trading toolbox!