Forex Pivot Points

Pivot points are used by professional traders and market makers to spot important support and resistance levels in the forex market. A pivot point and its support or resistance levels are areas where the direction of price movement can perhaps change. They are particularly of importance to short-term traders who wish to take advantage of small price movements.

Both range-bound traders and breakout traders can utilize pivot points. For range-bound traders, pivot points are to be used for identifying reversal points. On the other hand, breakout traders would use pivot points to make out key levels that are needed to be broken for a move to be considered as a real deal breakout.

You can calculate the pivot point and associated support and resistance levels with the last trading session’s open, high, low, and close values. As the Forex market is open for 24 hours, most of the traders use market timing s of New York as closing time, which is 4:00 pm EST as the previous day’s close.

Pivot point can be calculated as

Pivot point or PP= (High + Low + Close) / 3, which means it is an average of the three values.

For calculating the support and resistance levels the formula are:

For the first level support and resistance:

First support or S1 = (2 ´ PP) – High

First resistance or R1 = (2 ´ PP) – Low

For the second level of support and resistance levels the formula are:

Second support or S2 = PP – (High – Low)

Second resistance or R2 = PP + (High - Low)

Almost all the automated charting software will calculate these support and resistance level within a fraction of seconds and plot a chart accordingly. Some of the charting software can also provide additional pivot point like a third support and resistance level and other intermediate levels or mid-point levels.

These “extra levels” aren’t as significant as the main five but it doesn’t hurt to pay attention to them. Here’s an example:

Pivot points are extremely elementary yet powerful tool for any traders involved in forex trading. It is therefore wise to understand the implications of pivot points in forex trading.