Pivot points were originally developed by floor traders in the equity and
commodity exchanges. They are calculated based on the high, low and
closing prices of previous trading sessions, and are used by traders to
predict support and resistance levels in the current or upcoming session.
These support and resistance levels can be used by traders to determine
entry and exit points - both for stop losses and profit taking.
Because the forex currency trading market is so large and liquid, pivot
points - which thrive in this type of market - are very useful. The large
size of the market, especially in liquid currency pairs such as the EUR/USD,
helps prevent market manipulation that would keep the market from adhering
to technical principles like support and resistance.Pivot points are
support and resistance levels derived from the previous period's high,
low, and closing values. There are a variety of pivot values with which to
trade, including monthly, weekly, and daily values. You could even
calculate hourly values. When determining which period to trade with,
you've got to consider your time frame as an individual and your
particular style. I'll use daily pivot points for the purpose of this
article since the focus is day trading.
Daily pivot points give a structure to each new trading day in the
currency market. With these values you can use traditional support and
resistance techniques to enter and exit trades. But before I get to the
strategy, I'll show you how to calculate pivot values.
Pivot Point (PP) = (High + Low + Close) / 3
Resistance 1 (R1) = (2 x Pivot Point) - Low
Support 1 (S1) = (2 x Pivot Point) - High
Resistance 2 (R2) = Pivot Point + (Resistance 1 - Support 1)
Support 2 (S2) = Pivot Point - (Resistance 1 - Support 1)
(Pivot values for several different currency pairs are posted on the
Trading Markets web site every day.)
The pivot values are plotted as horizontal levels which, in turn, serve as
support and resistance. The pivot point itself can be thought of as the
day's mid-point, or fulcrum. It's where the buyers and sellers meet to
determine the day's trend in a currency pair. The support and resistance
levels that are plotted around the pivot point are just that: potential
support and resistance.
A daily pivot point (in green), S2, S1, R1, and R2 values are plotted on
the chart below of the EUR/USD FX future. The chart is a 5-minute
interval. Notice how the Euro broke above the pivot point early in the
day, and then proceeded to trade up to R1, where it met resistance and
gyrated for the rest of the day.
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points Calculator |
