Pivot points

Pivot points are a form of support and resistance indicator, used by traders to anticipate price movement. Unlike fundamental analysis which relies heavily on economic indicators such as interest rates, trade balances, unemployment rates etc, pivot points provide traders with a visual tool to base their trading decisions on.

Determining pivot levels begins with the calculation of the actual pivot point, which is simply an average of the previous days high, low, and closing price. This number will be the basis from which all other pivot points will be calculated from. If the market rallies above this pivot point for example, this might indicate some strength in the market and vice versa. From this point you would then refer to the other 3 main pivot points to determine what the price may do next.

15 minute USD/JPY chart. Pivot Points based on prior days activity.

Notice on this particular chart there are only support & resistance levels 1. There is no need to put the 2nd and 3rd support & resistance pivot levels in because the volatility isn't great enough in this particular example. The actual price levels of the pivot points are shown under the respective pivot level. Here are the formulas used in determining the most commonly used pivot points, which is called the five-point system:

To calculate the actual pivot point (P) = (H+L+C)/3. Where H is the highest price, L is the lowest price, and C is the closing price of the previous days trading. In 24 hour markets such as the forex market, the high, low and closing prices are often calculated by using the Once the daily pivot number has been calculated, the next step is to calculate the initial support (S1) and resistance (R1) levels. Resistance Level 1 = (2*P)-L Support Level 1 = (2*P)-H

A second pair of support and resistance points are used when the price breaks the previous day’s trading range, and continues in the same direction until it comes to a second higher level of resistance or lower level of support. The calculation of these second pivot points are as follows: Resistance Level 2 = P + (R1 – S1) Support Level 2 = P - (R1 - S1)

These are the main pivot point levels used by traders around the world. Although you can have as many pivot levels as you want, it is most of the time unpractical, since the volatility that is needed to reach further pivot point levels would not often be adequate enough. Pivot points are a very widely used technical analysis tool, especially in the forex market.