The pivot points indicator is a technical analysis tool that is commonly used in forex trading to identify potential levels of support and resistance. It is based on the idea that prices tend to move in a predictable pattern around a central pivot point.
The pivot point is calculated using the average of the high, low, and closing prices from the previous trading day. From the pivot point, traders can calculate three levels of support and three levels of resistance, which are referred to as “pivot levels.”
Traders use pivot points to identify potential levels of support and resistance and to make predictions about future price action. For example, if an asset’s price is trading above the pivot point, traders may expect the price to experience resistance at the first level of resistance and potentially reverse direction. Conversely, if an asset’s price is trading below the pivot point, traders may expect the price to experience support at the first level of support and potentially reverse direction.
It’s important to note that pivot points are not a guarantee of future price action and can be subject to false signals and divergences. Traders should use the pivot point indicator in conjunction with other forms of analysis, such as price action and market sentiment, to make informed trading decisions. Additionally, traders should be aware of the limitations of pivot points and use other indicators or technical analysis techniques to confirm signals generated by the pivot point indicator.