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Pivot Point Trading

To trade forex using a pivot point is basically a value around which it is expected that trends will reverse or breakout and therefore it is a point of a lot of importance around the quantitative day trading that many people do. The idea is to use the numbers for the previous day to calculate the different values that will be of importance in the area and therefore use those calculated numbers to make the trades for that specific day. Professional traders and market makers use pivot points to identify important support and resistance levels.




The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.

The calculation for a pivot point is shown below:

* O = open price from previous day

* C = closing price from previous day

* H = high value from previous day

* L = low value from previous day

Calculate the pivot point (PP) first…

*PP = (H + C + L) / 3

Then calculate the first support and resistance levels (S1 and R1)…

* S1 = (2*PP) – H

* R1 = (2*PP) – L

Then calculate the second support and resistance levels (S2 and R2)…

*S2 = PP – (R1 – S1)

*R2 = PP + (R1 – S1)

Then calculate the third support and resistance levels (S3 and R3)…

*S3 = L – 2(H – PP)

*R3 = H + 2(PP – L)

The three most important pivot points are R1, S1 and the actual pivot point. Don’t worry you don’t have to perform these calculations yourself. Your charting software will automatically do it for you and plot it on the chart.

There are number of ways that you can apply the pivot point and the support and resistance levels in relation to the pivot point. The only set rule for you to keep in mind is this; if the opening price for the day is below the pivot point, then your preference should be towards sell/short trades whereas if the opening price for the day is above the pivot point, you should be looking primarily for buy/long trades.


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17 comments:

Julie said...

WOW, thanks so much for this post. Your blog is making this Forex thing so understandable for me!

daria369 said...

I have to admire (you) people with analytical minds who are willing to share their findings and explain complicated things to others - thank you!!

corrin said...

That makes sense. How often is the pivot point accurate?

Christina thecoffeelady said...

o my.... that was pretty greek to me! I appreciate your efforts... there are just something I don't think I will understand.

Sam Servedio said...

Good post on how the software works along with what to look for. Thanks for sharing!

Scott said...

Thank you for such an informative post. I have often thought about trying my hand at the forex trading as you make it seem so easy.

Owen Cutajar said...

That was really interesting. I never knew how that was figured out.

BarbaraRae said...

You really do a good job of making this sound easy and relatively risk free!

Karen said...

Have things changed since the new US president took office?

Maureen said...

Forex is interesting for sure. I'm nervous about trying it though.

MorgansMummy said...

I second Daria lol It goes straight over my head and Im in awe over people who can make sense of this kinda stuff lol.

Heather in Beautiful BC said...

This is very complicated for me to understand - and makes me soooo glad I have a financial advisor to make sure I'm buying the right stocks and mutual funds :)

Sadie said...

I think I'm starting to learn a lot more about Forex by reading your blog. Thank you! :)

Samantha and Mr. Tigger said...

Wow! You make it sound easier than it looks! Thanks for sharing and making it less complicated!
Your FL furiends,

Diane Scott said...

Strangely I was thinking just the reverse than Julie's remark. Not that you haven't done and continue to do a fine job with explaining Forex, but I swear it does look like rocket science to me LOL!

Lisa said...

Thanks for taking the time and explaining this. If often seems like it is a foreign language to most of us.

Connie said...

I wish I could understand these things. You did everything right in explaining, it's just me. I have trouble helping my dd with Math and she's in 4th grade!

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