Wednesday, May 24, 2006

Pivot Points explained

Hi All!
After yesterdays trades using pivots as an indicator for exit and entry, I had a flurry of enquiries for clarity.
So here we go.

How to Calculate Pivot Points
There are many methods for calculating pivot points (I actually use a software based one for MT4). The formula below uses the previous day's high, low and close, along with two support levels and two resistance levels (totaling five price points) to derive a pivot point.

The equation is;-

R2 = P + (H - L) = P + (R1 - S1)
R1 = (P x 2) - L
P = (H + L + C) / 3
S1 = (P x 2) - H
S2 = P - (H - L) = P - (R1 - S1)

"S" = support levels, "R" = resistance levels and "P" = the magic pivot point. High, low and close are represented by the "H", "L" and "C" respectively. Our high, low and close in 24-hour forex markets are calculated using New York closing time on a 24-hour cycle.

Using Pivot Points
When calculating pivot points, the pivot point itself is the primary support/resistance. The other support and resistance levels are less influential, but may still generate significant price movements.

Pivot points can be used in a variety of ways. The first way is for determining overall market trend: if the pivot point price is broken in an upward movement, then the market is bullish, and vice versa. Keep in mind, however, that pivot points are short-term trend indicators, useful for only one day until they need to be recalculated. I use them for re-enforcing any candlestick action I see

Pivot points are a useful tool, which when coupled with other indicators give a powerful prediction of future direction. The success of a pivot-point system, however, lies squarely on the discipline of the trader. On your ability to effectively use the pivot-point systems in conjunction with other analysis. The greater the number of positive indications, the greater the chances for success.

Want to learn more about pivot points?
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