Pivot Points Can Reveal Opportunities to Buy and Sell

June 6, 2009 by  
Filed under Forex Trading

‘Pivot points’ are a technical indicator used in Forex trading that have become very popular due to their sheer simplicity. Every trader should become familiar with them, and determine how they can best fit into the overall strategy employed in the Forex markets.

Other available indicators, including moving averages and parabolic SAR are very technical and require some level of intense understanding of mathematics. Full understanding of these traditional indicators is usually only possible with the practice of actually calculating them at some point.

Pivot points, on the other hand, can be calculated by anyone with a third-grade education. The formula is as follows: Pivot Point = (H+L+C)/3. C is the currency pair closing price, H is the high for the previous day, and L is the low. This formula arrives at the average of these three data points.

Since the Forex market is always trading 24 hours a day, C is typically recorded at the time that New York’s market closes at 4 p.m. EST. Other points, called resistance and support, can be calculated to be used in conjunction with pivot points.

The pivot point may be determined to be the price of support or resistance, used in these calculations. This determination all depends upon whether recent price movements are headed up or down. Some investors may simply rely on the closing price from the day prior to base the support or resistance calculation on.

There are two resistance points and two support points, one each for the low and high for the day, and the low and high of the pivot point. The first resistance level is found by: (P x 2) – L, where P= the pivot point and L= the low from the previous day. Next, calculate the first support level with : (P x 2) – H, where H= the high from the previous days.

Now, take the first resistance (R1) and support (S1) points to find the second with the following formulas: R2 = P + (R1-S1), and S2 = P – (R1-S1).

How do you use these calculations in your daily Forex trading? It’s pretty simple. If the price goes over the pivot point, the Forex market is more bullish, and if it falls below, it is more bearish. When the price rises above the pivot point, this number serves as a resistance, and when it falls below it is a support point.

These pivot points may also be used to determine when you will enter or exit the Forex market. Buy and sell orders are very tricky with the currency exchange rates, but can be simplified somewhat with the use of these calculations.

Buy points may be considered when the price of a specific currency rate breaks through a point of resistance, and sell orders might be placed if the price falls below a support point.

Practice using these calculations for at least a month before attempting to use pivot points in your strategies that involve real money – this will ensure you understand them completely!

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