Forex Trading Blog

Learn this powerful Fibonacci Retracement method FREE that makes 500+ pips per trade. Get these Forex Scalping Cheatsheets plus 10X Scalping System FREE. Download this 1 Minute Forex Trading System FREE. Pivot Points are a mathematical formula that is used to determine the next period’s range based on the previous period’s high, low and close. Now, the range which is the high and low of a given time period accurately depicts the exuberant bullishness and the pessimistic bearishness of that trading session.

High and low for a trading period are two very important numbers as they represent human emotional behavior. High represents those who bought out of pure greed and later on regreted when the market reacted and declined from that level. Similarly, low represents those who sold out of fear. They later on regretted when the market went high. So, High (H) and Low (L) for a given trading period are two very important reference points.

Now, we calculate the Pivot Point with the following formula that uses the High (H), Low (L) and the Close (C)

Pivot Point (P)= (H+L+C)/3

Resistance (R2)= P+H-L

Resistance (R1)=2P-L

Support (S1)=2P-H

Support (S2)=P-H+L

Now you can add a third level to these pivot calculations to help target extreme price swings that can happen due to the breaking news event. Currency market is highly dependent on domestic as well as international news events so a third level of support and resistance can be included;

Resistance (R3)=H+2(P-L)

Support (S3)=L-2(H-P)

Some traders also calculate the Pivot Point with the High(H), Low (L), Open (O), Close(C);

Pivot Point=(H+L+O+C)/4

Since there is no formal opening and closing in the currency market, a forex trader can take the New York Bank Settlement Time as the formal close 5:00 PM EST and take 5:05 PM EST as the next day’s open session. Whatever, you can choose different times as well,it is up to you.

Keep this mind that Pivot Points are not a Holy Grail. These numbers are just a guide for you. Now, in a day, the market will rarely trade beyond R2 and S2. What these three support and resistance levels will do for you is to filter out excess information for you so that you get a very clear picture of the market. This is the beauty of pivot points that they remove information overload from you and help you avoid analysis paralysis. Now let’s discuss the significance of these three support and resistance levels!

R3 and S3 means extreme bullishness or bearishness in the market usually driven by news driven price shocks. R3 and S# is a good opportunity for a shor reversal scalp trade for a day trader. R2 and S2 means bullish or bearish conditions in the market with the time to take profit for a long positions or a short position. Similarly, R1 and S1 means mild bullish and bearish in a low volume light volatility consolidating market conditions. Price will come close to this level but most of the time will not be able to break it.

Now begin breaking the timeframes from longer to shorter. From Monthly to weekly to daily. This way you will get a clear picture of the market. When the closing price is above the pivot point of the day, it means the next day, the start market sentiment will be bullish. When the close price is below the pivot point of the day, it means a bearish sentiment will prevail in the market. So what the pivot point analysis does is provide you with a set of three support and resistance lines that can be used to filter out excess information and focus on where the price action is heading.

Now, calculating these different numbers in pivot points may be laburious and confusing. Many trading software can do that for you. You should take a look at this Traders Calculator that does the calculation for you. It not only calculates the Pivot Points but also Fibonacci Retracement Levels, next days high and low, risk per trade, overbought and oversold indicator, camarilla equation calculator and Gann Square of Nine Calculator. This Gann Square of Nine Calculator is real interesting.