A:

Pivot points were originally developed by floor traders in the equity and commodity exchanges. They are calculated based on the high, low and closing prices of previous trading sessions, and are used by traders to predict support and resistance levels in the current or upcoming session. These support and resistance levels can be used by traders to determine entry and exit points - both for stop losses and profit taking.

Because the forex currency trading market is so large and liquid, pivot points - which thrive in this type of market - are very useful. The large size of the market, especially in liquid currency pairs such as the EUR/USD, helps prevent market manipulation that would keep the market from adhering to technical principles like support and resistance.

Pivot Point Calculator
Many free pivot point calculators are available online to help traders calculate their pivot points for the current or upcoming trading session. Pivot point calculators are a valuable tool, but also unnecessary, as the formula is actually quite simple. The pivot point for the current trading session is calculated as:

Pivot Point = (Previous High + Previous Low + Previous Close) / 3


The pivot point can then be used to determine levels of estimated support and resistance levels for the day:

Resistance Level 1 = (2 * Pivot Point) - Previous Low
Support Level 1 = (2 * Pivot Point) - Previous High

Resistance Level 2 = (Pivot Point - Support Level 1) + Resistance Level 1

Support Level 2 = Pivot Point - (Resistance Level 1 - Support Level 1)

Resistance Level 3 = (Pivot Point - Support Level 2) + Resistance Level 2

Support Level 3 = Pivot Point - (Resistance Level 2 - Support Level 2)

Forex Day Trading
Because the forex market is a 24-hour market, there is often confusion about what time of day to use when calculating the closing price of one trading session and the opening of another. The generally accepted times used when calculating pivot points is 23:59 GMT for the close of a trading session, and 00:00 GMT for the opening of the new session.

The forex day trader can use daily data to calculate pivot points and support and resistance for the upcoming trading day. Weekly, swing forex currency traders can use weekly data to calculate pivot points and support and resistance for the upcoming trading week. Longer term forex currency traders can use monthly, yearly, or even longer time frames when calculating pivot points and support and resistance levels on their charts. Calculations can be done quickly and easily on free forex pivot point calculators across the internet, or by hand using the simple equations noted above.

To learn more, read Using Pivot Points In FX.

RELATED FAQS
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  4. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  5. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  6. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
Related Articles
  1. Technical Indicators

    Four Commonly Used Indicators In Trend Trading

    No single indicator can punch a ticket to market riches, but here are four that remain popular among trend traders.
  2. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  3. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  4. Investing News

    Is It Time To Sell Technology Stocks? (LNKD, AAPL)

    Technology stocks have taken a drubbing in recent days. Is it time to sell them?
  5. Budgeting

    Is Living in Europe Cheaper than in America?

    Learn how living in Europe has financial advantages over living in the United States. Discover the benefits to take advantage of when it makes financial sense.
  6. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  7. Charts & Patterns

    How To Use Volume To Improve Your Trading

    The basic guidelines to analyzing volume may not apply in all situations, but overall, they can help direct entry and exit decisions.
  8. Trading Strategies

    4 Common Active Trading Strategies

    Active trading entails buying and selling securities with the intent of profiting from short-term price movements.
  9. Chart Advisor

    Stocks With More Upside Due to Bear Traps (TAP, SPY)

    A bear trap is a pattern that typically leads to at least a short-term rise in prices. Here are stocks exhibiting the pattern.
  10. Stock Analysis

    3 Risks U.S. Equities Face in 2016

    Find out why the probability of a U.S. stock bear market is increasing in 2016 and what the greatest risks are to the bull market that is almost 7 years old.
RELATED TERMS
  1. Golden Cross

    A crossover involving a security's short-term moving average ...
  2. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
  3. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  4. Confirmation

    The use of an additional indicator or indicators to substantiate ...
  5. Indicator

    Indicators are statistics used to measure current conditions ...
  6. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center