A pivot point is a price level /region/zone or area of significance in technical analysis of a financial market either (currency or stock) that is used by traders as a predictive indicator of market movement. It is sub-divided into 3 levels namely the central pivot, resistance and support. These 3 key pivot levels can be calculated by deriving values of the high, low, open and close of the previous candle to formulate them.
Pivot levels are very important tools a Forex trader must put into consideration when trading as price reacts vigorously to these levels. There are 2 things that can happen to price at pivot levels; its either price bounces back and starts going towards the opposite direction or it breaks it and moves further to the next pivot level.
Pivot Points were originally used by floor traders to set key levels for taking profit or calculating risk (stop loss). It has been used for decades and continues to be one of the major tools in Forex trading. It is said that a trader trading without using pivot levels is a blind-trader. Another key important pivot levels are the mid-resistance and mid-support, though some traders don’t focus more attention on it but it can also be of great usefulness.
The major resistance and support levels are the R1, R2, R3 and S1, S2, S3. The extreme pivot levels R3 and S3 can be used to determine whether a market is over-bought or oversold, hence it is best not taking trades at these levels as a possible reversal or retracement could wipe out a stop loss if deals are opened at these levels. I personally don’t pick entries that show up on R2 and S3 levels due to the fact that the market is half way to be over-bought or over-sold
An intra-day trader calculates the present day’s pivot levels by deriving parameters such as the open, close, high and low of the previous day trading session. There are 3 major versions of calculating pivots namely the Standard Pivot Points, Demark Pivot Points and Fibonacci Pivot Points but we will focus on the Standard Pivot Points which are mostly used by floor traders.
Here is a simple calculation for deriving the Standard Pivot Points. However, i have attached an auto-pivot calculator that will do the mathematical calculations for you to save you time and brain stress.
R3 = R2 + (H – L)
R2 = CPP + (H – L)
R1 = (2 * CPP) – LOW
CPP = (HIGH + LOW + CLOSE + OPEN) / 4
S1 = (2 * CPP) – HIGH
S2 = CPP – (H – L)
S3 = S2 – (H – L)
As seen in the charts above, the red lines represent the resistant levels while the green lines represent the support levels. You can also get the weekly pivots levels by going to the menu of the indicator after it has been attached to a chart, go to the ‘input’ column and enable ‘true’ to get the weekly pivot points. Download below and good-luck.