Pivot Points-A Powerful Trading Tool!

Many traders are not familiar with the pivot point analysis despite the fact that it is one of the most robust, time tested and proven method of market analysis. Pivot Points work in all markets whether it is forex, futures, stocks, commodities or ETFs that have an established range. Range means the high and low in a trading period.

The high and low are the two most important reference points for a given trading session. The high is a reference point for those who bought out of greed thinking that they were missing an opportunity. Similarly, the low depicts selling out of fear thinking that they would lose by staying in the long trade.

For calculating the pivot points for any trading session, we use the High (H), Low (L) and the Close (C) of the previous session.

Pivot Point P is the sum of the high, low and the close divided by 3:

P= (H+L+C)/3

The three pivot point resistances are calculated as follows:

Resistance R3=H=2(P-L)

Resistance R2=P+H-L

Resistance R1=2P-L

The three pivot point support levels are calculated as follows:

Support S1=2P-H

Support S2=P-H+L

Support S3=L-2(H-P)

Since there is no formal open and close in the forex market, we can take the NY Bank Settlement at 5:00 PM EST as the close of the daily trading session and 5:05 PM EST as the next day’s trading session open. It is rare to find the daily trading session go beyond the R2 and S2 levels.

R3 is for an extremely bullish market that is usually caused by a news driven event. In a bullish market R2 is important while in a bearish market R1 is important.

Similarly in a bullish market S1 is important while in a bearish market S2 is important. S3 rarely comes into play and is only effective in an extremely bearish market caused by a news driven event.

Now, you might be feeling analysis paralysis due to information overload caused by too many levels used in pivot point analysis. Here is how you are going to filter these numbers. Pivot Point can be used as the actual trading number in determining the high or low of a given time period. Read the next article on how to filter these numbers. Try these Forex Signals by two top gun traders in a friendly competition. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade.