How to use pivot points in forex and stock trading




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How to use pivot points in forex and stock tradingHow to Use Pivot Points in Forex and Stock Trading?

I already knew that some traders use nothing but Pivot Points to trade, but I had never used it because I had been stuck to my own trading system (s). This weekend I spent some time to research about Pivot Points to see how others use this indicator for intraday trading and I found it really useful to have the Pivot Points on the charts even if you follow a different trading system.

Most traders who use Pivot Points are intraday traders. I mean Pivot Points can be used mainly for intraday trading.

What Are Pivot Points?

Pivot Points or Pivot Levels are nothing but some support and resistance levels that you can calculate and plot on your charts very easily. Some platforms support Pivot Points, but if you use a platform that doesnt support it, you can easily calculate and plot them on the charts manually.

Pivot Levels are calculated using three types of information from the previous trading day:

High price

Low price

Close price

Even in forex market which is a 24 hours market we have high, low and close price for each day. The easiest way to find the high, low and close prices of the previous day is checking the previous day candlestick on the daily chart. Each candlestick on the daily chart takes 24 hours to mature. Then the next candlestick opens. So if you want to trade today which is for example Feb 3th, you need to check the Feb 2th candlestick on the daily chart and find the high, low and close prices.

If you dont know what high, low and close prices can be found in a candlestick, please read my candlestick article:

So Pivot Points that should be used for todays trading are plotted using the high, low and close price of the previous day. You can plot the Pivot Points (levels) on smaller time frames like one hour or five minutes chart. Pivot Levels tell you that when and how the price will reverse and change the direction.

Like all other indicators and signals, Pivot Points is not a 100% guaranteed indicator, and sometimes it doesnt work, but as I explained at the beginning of this article, it is good to have them on your charts even if your trading system is not based on the Pivot Points.

The first and most important Pivot level is the Pivot Point which is the average of the high, low and close price of the previous day:

Pivot Point = ( Yesterday High + Yesterday Close + Yesterday Low )/3

Then we have Resistance 1 and Support 1 or R1 and S1:

Resistance 1 = ( Pivot Point x 2 ) Yesterday Low

Support 1 = ( Pivot Point x 2 ) Yesterday High

Pivot Point, R1 and S1 are the most important Pivot Levels, but we can also calculate the Resistance 2 and Support 2 or R2 and S2.

Resistance 2 = Pivot Point + ( Yesterday High Yesterday Low )

Support 2 = Pivot Point ( Yesterday High Yesterday Low )

So we will have 5 horizontal lines on our chart: