For as long as anyone can remember, traders have made use of pivot points to identify crucial support and even resistance stages. Pivots have also proven to be useful in forex market and have been utilized by foreign exchange currency traders to locate points of entry. In addition, trend traders and breakout traders use pivot points to locate the salient levels that must be exceeded in order that a move may be considered a breakout.

It is helpful for forex traders to understand exactly the calculations for pivot points are made, the means by which these pivot points may be applied in forex trading, and finally some ideas for combining these indicators with other forex trading strategies.

A pivot point is defined as a point of rotation. The pricing levels used to compute the pivot point include the priour period high, low and closing amounts. Normally, these prices are extracted from the security’s daily charts, however, the pivot point may additionally be derived by taking data from hourly charts. It is common practice to use the figures from the daily charts and make application from there to the shorter time frame charts. The reason for this is that the pivot points computed based on the more frequent time frames tend to be less reliable than those from the daily charts.

The standard formula for the pivot point is thus:

Central Pivot Point (P) = (High + Low + Close) / 3

The support and resistance levels are subsquently compute from the pivot point as follows:

The first level support and resistance:

First Resistance (R1) = (2*P) – Low

First Support (S1) = (2*P) – High

Similarly, second level of support and resistance formulas are:

Second Resistance (R2) = P + (R1-S1)

Second Support (S2) = P – (R1- S1)

Computing two support and resistance levels is often done, however many traders will go further and extrapolate the third support and resistance level also. Additionally, many traders go farther into analyzing pivot points. For instance, it is not unheard of for traders to also locate the the mid-point between the support and resistance levels.

As a rule, pivot points are considered the principal support or resistance level.

Pivots are particularly well-used by forex traders because currency pairs often waver between those levels. Learning how to identify the possible turning points will help forex traders to be better acclimated to changes in the market and additionally to execute better informed trading decisions. Due to how simple it is to compute them, pivot points can be combined with other trading strategies.By combining several strategies, traders can gain the benefit of the strengths of more than one strategy and derive a trading system that is truly unique. Regardless of how the trader uses them, pivot points are a useful tool that forex traders should be aware of and put to work in their own trades.