Forex Education

Classic Pivot Points

What are pivot points?

Pivot Points originated in trading pits (You know, the place where there is a bunch of crazy people screaming "buy" and "sell"?). Traders basically created a mathematical formula that would divide the current price range into sections.

Before you say 'MORE MATH?' and close the webpage don't worry there is little to no work on your side to find out pivot points. Your broker or charting software usually does it all for you, oralternatively, you could use a pivot point calculator.

Pivot points are enormously popular, even on today's electronically traded markets. Because a lot of traders are watching these points the markets will often react at these levels. In fact, some commercially available systems and websites use nothing more than pivot points to form buy and sell signals.

So, how are these levels calculated? Well here is the formula (feel free to skip this part):

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High: The highest point the price reached the previous day.

Low: The lowest point the price reached the previous day.

Open: The level the price opened for the day.

Close: The level at which the price ended the day.

R3 = High + 2 x (Pivot - Low)
R2 = Pivot + (High - Low) = Pivot + (R1 - S1)
R1 = (Pivot x 2) - Low
Pivot = (High + Low + Close) / 3
S1 = (Pivot x 2) - Hight
S2 = Pivot - (High - Low) = Pivot - (R1 - S1)
S3 = Low - 2 x (High - Pivot)

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Don't worry. You do not need to know this stuff; there are plenty of pivot point calculators online that cut out all the hard work. In fact Forex4Noobs.com ahs its very own pivot calculator here.

As I said earlier, Forex runs for 24 hours. So how can we get an open and close price? Well this is debatable. Some people say to use 12 midnight GMT time, and others say 12 midnight N.Y (New York time) time. I say use neither. I have found that 12 GMT works best but try all the variations for a few weeks and decide for yourself. Your high and low should be taken from in-between that 24 hr period.

These points divide the chart into sections. PP is the middle point and anything above that point is seen as bullish. Anything below is seen as bearish. R1, R2, and R3 are the resistance level and they are always on top of the PP. S1, S2, and S3 are always found below PP and they act as support.