What Are Pivot Points?

Pivot points are used by traders to attempt to predict support and resistance levels. They are commonly used in the forex market as are used as visual cues to execute trades.

Pivot Points are calculated using the open, high, low, and close, from the previous trading day. Standard pivot points include the pivot point itself, three full support levels, and three full resistance levels, but two half way support levels, and two half way resistance levels are also often included.

Daily pivot points are the most commonly used, but weekly and monthly pivot points are also available.

How to Calculate Pivot Points?

As you can see from the formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.

Calculation Description: Pivot points are various calculations, made using the open, high, low, and close, from the previous trading day (Y).

PP = (YHigh + YLow + YClose) / 3 S1 = (PP * 2) - YHigh S2 = PP - (YHigh - YLow) S3 = (2 * PP) - ((2 * YHigh) - YLow) R1 = (PP * 2) - YLow R2 = PP + (YHigh - YLow) R3 = (2 * PP) + (YHigh - (2 * YLow))

How to Use Pivot Points for Trading?

The main Pivot Level is the most important level (YHigh + YLow + YClose) / 3. The first way is for determining overall market trend. In a trading day, if the price opens under this level, it means the price has a stronger tendency to go down and Bears are stronger. So we can take a short (sell) position. If the price opens above the Pivot Level, it means Bulls are stronger and we can take a long (buy) position. All other levels may work as support and resistance and so we have to be careful when the price reaches them.

The second method is to use pivot point price levels to enter and exit the markets. The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. By the time the market reaches R2, R3 or S2, S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

 

Pivot points are especially useful to short-term traders who are looking to take advantage of small price movements.

Why do Pivot Points work?

First, Pivot points outperform other trading techniques and indicators also because they are predictive as opposed to lagging.

Second, Pivot points are based on the existence of support and resistance levels. These levels receive full attention from the vast majority of professional traders who trade on behalf of all kinds of large, medium, small financial institutions, funds as well as for themselves. Because so many traders worldwide use Pivot points for trading, Forex market reacts at these levels in a quite predictable manner, respecting support and resistance levels and creating a lot of trading opportunities.

Finally, you may go to http://buysellorstayout.com for a free subscription to the Daily High Low Projections for 13 pairs of currencies including Pivot points and support & resistance levels.

I hope you enjoyed this article and learned something from it