Understanding Pivot Points!

Pivot Strategies: A Handy Tool by Kathy Lien,

For many years, traders and market makers have used pivot points to determine critical support and/or resistance levels. Pivots are also very popular in the forex market and can be an extremely useful tool for range-bound traders to identify points of entry and for trend traders and breakout traders to spot the key levels that need to be broken for a move to qualify as a breakout.

In this article, we'll explain how pivot points are calculated, how they can be applied to the FX market, and how they can be combined with other indicators to develop other trading strategies.

(It may be easier to just watch the video)

Calculating Pivot Points By definition, a pivot point is a point of rotation. The prices used to calculate the pivot point are the previous period's high, low and closing prices for a security. These prices are usually taken from a stock's daily charts, but the pivot point can also be calculated using information from hourly charts.

Most traders prefer to take the pivots, as well as the support and resistance levels, off of the daily charts and then apply those to the intraday charts (for example, hourly, every 30 minutes or every 15 minutes). If a pivot point is calculated using price information from a shorter time frame, this tends to reduce its accuracy and significance.

The textbook calculation for a pivot point is as follows: Central Pivot Point (P) = High + Low + Close) / 3 Support and resistance levels are then calculated off of this pivot point using the following formulas: First level support and resistance: First Resistance (R1) = (2*P) - Low First Support (S1) = (2*P) - High Likewise, the second level of support and resistance is calculated as follows: Second Resistance (R2) = P + (R1-S1) Second Support (S2) = P - (R1- S1) Calculating two support and resistance levels is common practice, but it's not unusual to derive a third support and resistance level as well.

(However, third-level support and resistances are a bit too esoteric to be useful for the purposes of trading strategies.) It's also possible to delve deeper into pivot point analysis - for example, some traders go beyond the traditional support and resistance levels and also track the mid-point between each of those levels. Applying Pivot Points to the FX Market Generally speaking, the pivot point is seen as the primary support or resistance level.

Successful Trading!