Pivot Points are objectively calculated price levels that are derived from previous prices. They are widely used in the expectancy that these levels will act as S/R.
Daily Pivot points are calculated from the previous day's prices, and are widely used by day traders.
Monthly and Yearly Pivot Points are calculated from the previous month and year's prices, and tend to be used by longer-term traders.
In this lesson, we will learn how Pivot Points are calculated, and how to use them.
PIVOT POINT FORMULA
Forex traders are usually interested in daily and monthly pivot points, with daily pivot points being of more common interest. Pivot points are calculated according to a formula which takes the previous open, high, low and closing prices into account. So if we want to know at which prices today's pivot points are going to be at, we just need to know yesterday's open, high, low and closing prices. If we were calculating monthly pivot points, we would need to know these same prices for the previous month.
PIVOT POINT CALCULATOR/INDICATOR
Most charting software packages include an easy to use pivot point indicator that shows the pivot points on the screen. MT4 does not, but you can download an easy to use, free indicator from several sources to do the job.
PIVOT POINT TRADING
Some traders use trading strategies based only on the price's relation to certain pivot points. Very short-term traders, known as “scalpers”, like to use pivot points to make small fast profits under certain conditions. However, FX Academy recommends that pivot points are best used as additional indicators to give extra weight to a support/resistance level that has already been identified by some other means, as an additional indicator within the IRATE criteria.
One of the advantages of using pivot points is that they are objectively calculated, and so in theory every trader sees the same thing. This is basically true for monthly pivots, but daily pivots can be different depending upon the time zone used by charting software. For example, a chart that is set to GMT will calculate tomorrow's pivot points using opening and closing prices from midnight GMT, but a chart set to EST will use midnight EST, which is pretty likely to show a different price and so give different results in the calculation. Be aware that most traders are using either GMT or EST, so the daily pivot points produced by these time zones will usually carry the most weight.
Several different levels can be calculated as pivot points, but the most common structure is a calculation of the seven levels.
We begin with one level in the middle which traditionally is seen as a “fair value” price for the day or month. This level is simply called “the pivot”.
It is the average of the previous period's close, high, and low prices.
Above that, three resistance pivots, labelled in ascending order R1, R2, and R3.
Below “the pivot”, three support pivots, labelled in descending order S1, S2, and S3.
The resistance pivots are traditionally supposed to act as resistance, and the support pivots, of course, as support.
There is no reason why resistance can’t turn into support, and vice versa.
That's all a trader needs to know about pivot points.
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