Pivot Points

This lesson focuses on a useful method for identifying levels of support and resistance: pivot points.

1. What are Pivot Points?
2. Finding Support and Resistance Using Pivot Points
3. Pivot Points Example
4. Pivot Point Calculation
5. Overview of Pivot Points
   

1. What are pivot points?

Pivot points are a technical indicator used by traders to predict potential areas of technical significance, such as support and resistance levels. They are calculated as the average of the high, low, and closing prices from the previous period, which could be daily, weekly, or monthly intervals.

If the market is trading above the previous pivot point (known as P), it is considered a buy signal (bullish signal). Conversely, if the price is below, it is considered a sell signal (bearish signal).

Day traders often use pivot points to identify short-term trends. For example, if EUR/USD is trading above the previous pivot point (P), they may expect the price to continue rising and decide to buy the pair.

2. Finding support and resistance with pivot points

The pivot point (P) is not only used to measure the current price action. It serves as the basis for calculating six additional levels that help identify potential support and resistance areas. These levels are labeled as:

• S1, S2, S3 for Support

• R1, R2, R3 for Resistance

These levels are displayed on the chart as parallel lines to the pivot point (P) and can be used to set profit targets or as potential areas to open new trading positions.

3. Example of pivot points

Let’s look at an example with EUR/USD.

The pair is trading below the previous day's pivot point (P), which provides a short-term signal indicating a potential bearish trend. You decide to short EUR/USD at the current price.

You can focus on the S1, S2, or S3 levels as potential profit targets. Like other support levels, these will be stronger if the market has previously bounced off these levels. If S1, S2, or S3 align with a previous area of support, it could be a good target.

Alternatively, you can wait for EUR/USD to bounce off support (for example, at S1) and then open a buy position. If you do this, P or R1 could be good profit targets.

4. Calculation of pivot points

When trading on the FOREX.com platform, there is no need to manually calculate pivot points. If you want to display them on the chart, simply log in, select your market, and choose "Standard Pivot Points" from the indicator list.

However, if you'd like to manually calculate the pivot point (P), follow these steps:

1. Find the high, low, and closing prices for the previous day, week, or month.

2. Add them all together and divide the result by three.

3. Display this price on the chart as P.

The math for calculating the S and R levels is a bit more complex:

• R1 = (P x 2) - previous low

• R2 = (P - S1) + R1

• R3 = (P - S2) + R3

• S1 = (P x 2) - previous high

• S2 = P - (R1 - S1)

• S3 = P - (R2 - S2)

5. Overview of pivot points