Pivot Points In Forex Trading

Pivot points are enormously popular, even in today's electronically traded markets. Pivot points are support and resistance levels derived from the previous period's high, low, and closing values. Pivot points are points of resistance and support that are very likely to be the points at which short-term trends are reversed and the points at which long-term trends fall back to. Pivot points are frequently used by forex traders as a means to calculate resistance and support levels which are, in turn, used as visual cues to execute trades. Pivot points are especially useful to short-term traders who are looking to take advantage of small price movements.

Pivot Levels

Pivot point calculations are used by security traders to attempt to predict support and resistance levels. To calculate the pivot points and the associated support and resistance levels, traders use the last open, high, low, and close, from the last trading session. After calculating the previous days high, low and close you will find 7 points, 3 resistance levels, 3 support levels and the actual pivot point. Support pivot points are below current price and resistance pivot points are above current price. The support levels are S1, S2 and S3. The resistance levels are R1, R2 and R3. A demonstration of significant price activity above the daily pivot point is considered to have bullish implications, while significant activity below this level is bearish. The second set of support and resistance points, S2 and R2, are used in the event that the price breaks through the previous day's trading range and continues until it meets a second, higher level of resistance or lower level of support. By the time the market reaches R2, R3 or S2, S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

Trading Pivot Points

Trading pivot points can be a very useful exercise for Forex traders. Because so many currency traders follow pivot points you will often find that the market reacts at these levels. The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. The reason pivot point trading is so popular is that pivot points are predictive as opposed to lagging. The pivot points are considered as short-term trend indicators, and are generally useful for short term trading. By combining the Pivot Points with your favorite indicator you can develop your own trading system that no one else uses.

In conclusion, pivot points are used in the currency trading market by investors of all levels, including banks, professional traders, and mutual funds to help them determine when to buy or sell a particular currency. Pivot points are exactly what they sound like – the point at which the market is expected to turn – if it has been going either up or down, a pivot point is the value at which it will reverse the trend.