What Are Forex Pivot Points?
A pivot point is an indicator developed by floor traders in the commodities markets to determine potential turning points. In the forex and other markets, day traders use pivot points to determine likely levels of support and resistance, and therefore possible turning points from bullish to bearish or vice versa.
- Pivot points are seen as likely levels of resistance and support, and therefore potential market turning points.
- Pivot point methodology can be used to calculate multiple levels of support and resistance.
- Classic pivot points are calculated using the previous day's high, low, and closing prices.
Understanding Forex Pivot Points
Unlike most technical indicators, pivot points are intended to predict market turning points. They are calculated using simple math and the previous day's high, low, and closing prices. In the forex market, pivot points are calculated using the entire 24-hour trading period, with the price at the end of the U.S. "session" deemed the closing price.
The classic pivot point calculations produce the pivot point itself, the strongest of the indicators, as well as three levels of support and three levels of resistance. The location of price relative to the main pivot point is used to judge whether a given trading session has a generally bullish or bearish bias.
Pivot points form the foundation of much of the technical analysis used by day traders, although their effectiveness in indicating turning points may be due to the fact that they are so popular as an indicator market behavior at the given levels is something of a self-fulfilling prophecy. Longer-term pivot points can also be calculated using weekly, monthly, quarterly, or annual prices.
Trading With Pivot Points
No matter how accurate pivot points are at predicting turning points, traders still need a viable system to win with them consistently. As with all trading systems, that requires an entry method, a stop-loss trigger, and a profit target or exit signal.
Some day traders use pivot points to determine levels of entry, stops, and profit-taking by trying to determine where the majority of other traders may be doing the same. Forex pivot point calculators are available free of charge across the internet through retail forex brokers and third-party websites.
The most successful trading methods use pivot points with other technical indicators, such as trend lines, Fibonacci levels, moving averages, previous highs and lows, and previous closing prices.
Basic Pivot Point Formula
The formula for calculating the primary pivot point (using the previous day's prices):
Forex Pivot Point=3High+Low+Close