Forex NewbiesForex articles tips tricks ebooks tools novice forex trader advice

Pivot Points in Forex Trading

admin on May 28th, 2009

Pivot points is a widely used tool among the Forex traders. But many newbie traders don’t get the idea of using the pivots or just plainly end up using them in a wrong way. There are many types of the pivot points exist and also many ways to calculate them were developed, but here I’ll try to explain the methods of using and calculating the most basic pivots — floor pivot points.

In general, pivot point is a price level at which an important trend change may occur. It’s actually something different from the support or resistance level because the rate could previously freely fluctuate around that point. Pivot point holds the balance between the bulls and bears and thus can serve both as a support level and as a resistance level.

To calculate simple (floor) pivot points you’ll need to choose the period first. If you want to get the pivot points for today’s intraday session then you’ll need to take yesterday’s high/low/close (HLC) levels; if you need pivots for the whole week then take HLC levels from the previous week. The rule to calculate floor pivot point is simple: Pivot = (H + L + C) / 3. The resulting rate is your pivot for the calculated period. When the price approaches that level, it has a strong chance to reverse. On the other hand, if the price crosses the pivot level and goes far up or down after that, consider the pivot level broken.

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 those. 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. 3rd resistance is the weakest and 1st resistance is the strongest). Here are the rules to calculate resistances:

1st Resistance = (2 x P) – L
2nd Resistance = P + H – L
3rd Resistance = H + 2 x (P – L)

And supports:

1st Support = (2 x P) – H
2nd Support = P – H + L
3rd Support = L – 2 x (H – P)

If you want to know more about other types of pivot points or need a handy tool to calculate pivots for the Forex market, you can visit an on-line pivot point calculator. If you trade Forex using the MetaTrader 4 platform you can also download a pivot indicator to automatically see the daily pivot points in your MT4 terminal.

If you’d like to ask some questions about pivot points you can reply to this post via a form below.