A pivot point is a level in which the sentiment of traders and investors changes from bull to bear or vice versa. They work simply because many individual forex traders and investors, as well as bank and institutional traders use and trust them. It is known to every trader that the pivot point is an important measure of any market's strength and weakness.
Floor traders love pivot points. They act as magnets for price movements. If you observe how price moves during any trading session, you'll notice that it often stalls or stops at pivot points before resuming its movement.
To calculate daily pivot points you need the High, Low, and Close Price of the previous day. Simply set these three prices in the Forex Pivot Point Calculator and it will give you the values.
Here are the used formulas for calculating daily pivot points:
Pivot Point: P = (High + Low + Close) / 3 . Resistance 1: R1 = 2 * P - Low Resistance 2: R2 = P + (R1 - S1) Resistance 3: R3 = High + 2 * (P - Low) . Support 1: S1 = 2 * P - High Support 2: S2 = P - (R1 - S1) Support 3: S3 = Low - 2 * (High - P)
To calculate weekly pivot points, apply the same formulas, but using the High, Low, and Close Price of the previous week instead of the previous day.
As you can see from the above formulas, just by having the previous day's high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.
The three most important pivot points are R1, S1 and the actual pivot point. The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. By the time the market reaches R2, R3 or S2, S3 it will already be overbought or oversold and these levels should be used for exits rather than entries.
A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You will enter on a break of R1 with a target of R2 and if the market is really strong close half at R2 and target R3 with the remainder of your position.
Pivot points are one of the key tools traders use to determine where the price is likely to go and where it is likely to stall. However, you should use the pivot point's formulas above to create your own pivot points and then apply them to your own forex trading system.