Using Pivot Point in Forex Trading

Using Pivot Point in Forex trading enables us to see the sentiment of traders and investors is at any given moment. It also gives us a general idea of where the forex market is heading during the day. This information can help us decide which way to trade in the Forex market.

Pivot points, a technique developed by floor traders, help us see where the price is relative to previous market action.

As a definition, a pivot point is a turning point or condition. The same applies to the FOREX market - the pivot point is a level at which the sentiment of the market changes from "bull" to "bear" or vice versa. If the market breaks this level up, then the sentiment is said to be a bull market and it is likely to continue its way up. On the other hand, if the market breaks this level down, then the sentiment is bearish, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price can't break the pivot point, a possible bounce from it is plausible.

Pivot points work best on highly liquid markets, like the spot Forex market, but they can also be used in other markets as well.

There are several ways to arrive at the Pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session).

Pivot point (PP) = (High +Low +Close)/3

Take for instance the following EUR/USD currency:

Open: 1.2384
High: 1.2478
Low: 1.2362
Close: 1.2466

The PP would be: PP= (1.2478+1.2362+1.2466)/3 =1.2435

What does this number tell us?

It simply tells us that if the market is trading above 1.2435, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2435, the bears are winning the battle pulling prices lower. In both cases this condition is likely to sustain until the next session.

Besides the calculation of the PP, there are other support and resistance levels that are calculated taking the PP as a reference.

Support1 (S1) = (PP*2)-H
Resistance1 (R1) = (PP*2)-L
Support2 (S2) = PP-(R1-S1)
Resistance 2 (R2) = PP + (R1 - S1), where H is the high of the previous period and L is the low of the previous period.

Continuing with the example above,

PP =1.2435 S1= (1.2435 * 2)-1.2478=1.2392
R1 = (1.2435 * 2)-1.2362 =1.2508
R2 =1.2435+ (1.2508-1.2392) =1.2551
S2=1.2435-(1.2508-1.2392) =1.2319

These levels are supposed to mark support and resistance levels for the current session. In the example above, the PP was calculated using information of the previous session (previous day). This way we can see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so, we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point on a weekly or monthly basis is mostly used by long-term traders, but it can also be used by short-term traders - it gives us a good idea about the longer-term trend.

Sebastian Sim

I'm a 31 year old Singaporean. Who started my trading journey since 2004. Now, I focus mainly in Stock Options, Forex and Unit Trusts(Mutual Funds) Investments. I've started a site The Trading Zone - a site about trading psychology, Forex trading, investments and other topics that interests me from time to time.

http://sebastian-sim.blogspot.com

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