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 created a mathematical formula that would divide a chart into three sections.

Before you say ‘MORE MATH?’ and close the webpage, don’t worry there is little to no work to calculate pivot points. Your broker or charting software usually does it all for you, or alternatively, you could use a pivot point calculator. Forex4Noobs has an easy pivot point calculator.

Pivot points are enormously popular. In fact, some commercially available systems and signal service websites, only use pivot points to generate buy and sell signals.

So, how are these levels calculated? Well here is the formula.

High: The highest point the price reached the previous day.
Low: The lowest point the price reached the previous day.
Close: The level at which the price ended the day.

R3 = High + 2 x (PP – Low)
R2 = PP + (High – Low) = PP + (R1 – S1)
R1 = (PP x 2) – Low
PP = (High + Low + Close) / 3
S1 = (PP x 2) – High
S2 = PP – (High – Low) = PP – (R1 – S1)
S3 = Low – 2 x (High – PP)

As you saw above, pivot point calculation requires you to input three numbers. A currency pairs high, low and close prices for the previous day. But how do you get an open and close price on a 24 hour market like Forex? Well that is debated by many Forex traders.

Some traders use 12am GMT time as their open and close. Others use 12am New York time. Some traders don’t even use a full day price. Instead, they use U.S. stock market open/close times (9:30am-4:00pm US EST).

It is up to you which you use. Your best bet is to try all the variations for a few weeks and decide which one works best.

When you calculate your pivot points, you will see they divide your 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 levels and they are always on top of the PP. S1, S2 and S3 are always found below PP and they act as support.