The next support/resistance indicator we will consider is pivot points.

Pivot points are popular with some traders. The technique is used to calculate support and resistance levels that may provide signals regarding potential trade entry or exit points.

The concept is that there is a central price point in a trading session, based on historical price levels, where prices tend to gravitate and support and resistance levels where they tend to reverse.

A pivot point formula will usually identify five price levels. The central price level is called the pivot point. The first level above the pivot point is called “resistance one” (R1) and the second is called “resistance two” (R2).

Beneath the pivot point are “support one” (S1) and “support two” (S2).

Without trying to further exhaust you with math, the formula for determining the pivot point for any previous period of time is obtained by adding that period’s previous high, low and close together, then dividing that total by three.

The formula for the first support level calculation (S1) is: (2 x pivot) – previous high.

The first resistance level (R1) is: (2 x pivot) – level.

Support level two (S2): pivot – (R1 – S1).

For resistance level two (R2): (pivot – S1) +R1

Points are most indicative when applied to longer time frames. Trading software will do the calculations automatically. There is no need to do them manually, using a calculator and end of day data, unless you enjoy that sort of thing. If that’s the case, by all means, have at it.

Now, let’s take a look at an indicator that is considered effective for determining the strength of a trend.

Relative Strength Indicator

This indicator is known as the Relative Strength Indicator (RSI).

It was first developed in 1978, long before retail forex trading existed. It was initially used to act as an indicator for stocks, bonds, options and futures, but has made the transition to forex currency markets and proved reliable.

Like MACD, it is considered an oscillator.

It functions by calculating a trend strength value which is displayed graphically as a single line. RSI takes each new price as it becomes available according to default or trader determined parameters.

RSI assists a trader to determine whether a trend is gaining or losing momentum.

A trend that RSI shows is gaining momentum is considered as an opportunity to enter the market in the direction of the current trend, add to, or maintain an existing position.

On the other hand, if RSI is showing a trend losing momentum, it is used to quickly exit a losing position, exit a profitable trade at the most opportune time, or wait for a change in price direction.

RSI has an upper and lower threshold limit. A value of under 30 on a scale of 1 to 100 signifies that a currency pair is “oversold,” and that prices are likely to increase. A value of 70 or greater means that the market is “overbought” and should go down.

The RSI indicator has a center-line value of 50. When the RSI crosses above the center-line and until it reaches the 70 threshold, this is considered as a bullish buy signal. When it moves downward and crosses the center-line and until it reaches the 30 level, it is considered a bearish sell signal.

A word of caution is warranted with regard to the signals provided by the RSI.

Currency pair markets can and do continue to rise even when the indicator is showing overbought. They also can continue to fall in oversold conditions.

A good way to accommodate this reality is to give more credibility to the RSI signal in favor of the current trend.

In other words, in an uptrend, use RSI for a buy entry signal, but ignore it for a sell entry signal. In a downtrend, do the opposite. In either event, it can still be used to exit a profitable position when it appears the trend is losing strength.