What Is a Pivot Point in FOREX?
Pivot points were originally used by floor traders in the pit (the trading area on the exchange floor). Before the advent of computer systems a few simple calculations gave an indication of how to trade for the day, based on previous price movements.
Other People Are Reading
-
Definition
-
Pivot points are support and resistance levels at which the market direction is likely to change, giving a reversal of direction or a breakout from a trend.
Pivot Point Levels
-
The main pivot point and 2 or 3 levels of support and resistance are prepared. They are based on the high, low and closing prices for the previous day. As Forex is a 24-hour market, the price at the close of the New York exchange is usually used.
-
Advantage of Pivot Points
-
Pivot points are predictive, rather than lagging, indicators. This makes them very attractive to Forex traders wanting to know how the market is likely to react.
Calculation
-
There are many free pivot point calculators available on the Internet, but the basic formula is:
PP = (High + Low + Close) / 3
S1 = (PP * 2) - High
S2 = PP - (High - Low)
R1 = (PP * 2) - Low
R2 = PP + (High - Low)
Trading Forex with Pivot Points
-
The general rule is: market opens above the pivot point--trade long; below pivot point--trade short. Predicted support and resistance levels give areas of potential strength and reversal.
-
References
Resources
- Photo Credit Image by Flickr.com, courtesy of viZZZual.com
