Experienced Forex traders or market analysts always talk about Pivot Point (P) and support/resistance levels. These terms are vital, because they signify the points where the main price movements are anticipated to occur. These levels are determined by using the pivot points.
How to calculate:
It can be done manually by using a simple five-point system, or by using online pivot point calculator.
In the calculator you have to enter high, low, opening and closing prices from yesterday’s trading session. Only you are able to understand the levels, you will also learn to see the trends better. In due course, it helps you to predict future market movements accurately. You can always stay ahead of world events, and also understand the main reasons behind market fluctuations.
Manual calculation using five-point system:
The preceding days high(H), low(L), close(C), two support levels(S) along with two resistance levels(R) is used to derive the PP manually.
Equations are given below:
Pivot point (P) = previous days (H+L+C)/3
Support levels (S)
- S1 = (Px2)-H
- S2 = P-H+L
- S3 = S2-H+L
Resistance Levels (R)
- R1 = (Px2)-L
- R2 = P+H-L
- R3 = R2+H-L
If you want to calculate monthly or weekly numbers, then you will need to use the high, low, and close of last month’s, or last weeks. In Forex trading the H, L, and C are calculated by using the closing time 4 pm EST.
Interpreting Pivot Point
Pivot point (P) is the prime support and resistance level to be considered. R1, R2, S1 and S2 are less significant, but they still generate major price movements. You can use it in two ways.
1. Determine the whole market trend
2. Price levels can be used to enter or exit the market
Remember that it is a short term trend indicator.
Trading tips using PP
· When Forex market opens on top of P, then it will probably stay there. Traders can opt for long position and keep an eye on R1
- When Forex market opens at less than P, then it will possibly stay below. Traders can opt for short position and monitor S1.
- For buy, the stop-loss is S1. For sell, the stop-loss is R1 (In order to control the losses)
- When stock opens over R2 or under S2, then some sway is assumed.
- Avoid using P, when some latest news, which can impact stock price, is expected.
- They are not vibrant like the moving average, because their value remains same all through the day.
Pivot point system success lies on the traders’ capabilities to apply it, along with other form of technical indicators.