Pivot Points in Forex Trading
Pivot points are a widely used tool that many Forex traders employ. However, most newbie traders do not get the idea of the pivots or just plainly end up using them in a wrong way. There are many types of pivot points, and there are also many ways to calculate them, but here I will try to explain the methods of using and calculating the most basic pivots — the floor pivot points.
In general, a pivot point is a price level, at which an important trend change may occur. It is actually something different from the support or resistance level because the rate can freely fluctuate around that point. A pivot point holds the balance between bulls and bears and thus can serve both as a support level and as a resistance level.
To calculate simple (floor) pivot points you will need to choose the period first. If you want to get the pivot points for today's intraday session, then you will need to take yesterday's High/Low/Close (HLC) levels; if you need pivots for the whole week, then take the HLC levels from the previous week. The rule to calculate the floor pivot point is simple:
When you calculate a simple pivot level (P) you may also wish to calculate the pivotal support and resistance levels. They are common support and resistance levels and should be treated as such. If broken — feel free to enter a trade in the direction of the trend. Each following level is much weaker than the previous one (i.e., the third resistance is the weakest while the first resistance is the strongest). Here are the rules to calculate resistances:
- 1st Resistance =
(2 × P) − L - 2nd Resistance =
P + H − L - 3rd Resistance =
H + 2 × (P − L)
And supports:
- 1st Support =
(2 × P) − H - 2nd Support =
P − H + L - 3rd Support =
L − 2 × (H − P)
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