Forex pivot points are used in technical analysis to predict future price movements in currency trading. They are calculated by averaging high, low, and closing prices during a trading period, and three levels of support and resistance are also calculated. These levels are used by banks and currency dealers to make trading decisions.
Forex pivot points are points at or around which currency, or forex, prices are expected to pivot or change direction, as well as possibly gain momentum. These points are used as leading indicators of price movements, which means that they are considered somewhat predictive of the future course of price movements, either up or down. For example, prices trading above a pivot point in a particular period indicate an uptrend, with the expectation that prices will rise in subsequent periods. Prices trading below the pivot point in a particular period indicate a downtrend and an expectation that prices will move lower in subsequent periods.
The use of forex pivot points originated among those who practice technical analysis. The main premise of this analysis is that all available information is incorporated into the market price of a widely traded liquid asset. Technical analysis is popular with banks and other authorized currency dealers, who primarily trade or exchange currency pairs, such as the US dollar and Japanese yen, on the interbank market. Forex pivot points are calculated by averaging the high, low, and closing prices during a particular trading period. In the case of the foreign exchange market, this is usually one day, although the use of shorter periods, intraday and long-term is not uncommon.
Three levels of support and resistance are generally calculated in addition to forex pivot points for further support decision making. Primary support levels are considered floors below which prices are not expected to move. Prices that break out and continue lower are considered to mark a change in trend or a move to a lower trading range and require recalculation of pivot points, support and resistance levels. Conversely, prices moving above resistance levels are taken to indicate a change in trend or a move up to a higher trading range.
A primary support level is calculated by subtracting the previous trading period low from the pivot point and subtracting this difference from the pivot point. Rather, a primary resistance level is obtained by subtracting the pivot point price from the previous period’s high price and adding this to the pivot point. Secondary support and resistance levels are broader. Secondary resistance is calculated by adding the difference between the high and low prices to the pivot point. Secondary support is calculated by subtracting this difference from the pivot point.
Finally, a third, even broader set of support and resistance levels is calculated. Tertiary resistance is calculated by adding twice the difference between the previous high and low to the pivot point. Tertiary support is calculated by subtracting twice the difference of the forex pivot points.
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