Pivot points in Forex Trading: Forex strategies for success

Pivot points show us the levels in which prices may change. With a couple of simple calculations, forex traders are able

to get a general idea about direction in which prices are moving during the day. Pivot points are calculated using a couple of mathematical formulas and data of the previous day or the last trading session (maximum price (H), minimum price (L) and closing price (C)). The sequence of points resulting from the calculations is important to determine the levels of support and resistance.

Here is the formula to calculate the pivot points:

PP = (H + L + C)/3.

Once we have calculated pivot points, it's easy to get the levels of support and resistance.

First level of support and resistance:

- Resistance (R1) = (2 * P) - Low Price

- Support (S1) = (2 * P) - High Price

Second level of support and resistance:

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

- Support (S2) = P - (R1 - S1)

Third level of support and resistance:

- Resistance (R3) = Price High + 2 * (P - Price Low)

- Support (S3) = Price Low - 2 * (Price High - P)

Often, Pivot points are calculated automatically by trading platforms. All you have to do is to understand the meaning

of pivot points and their use. First of all, we must always remember that pivot points are short-term indicators and

therefore are useful only for a day. Below, they will need to be recalculated.

Pivot points are able to foresee two things:

- general market trend: if the price of pivot points is upward, the market is bullish, if the price of pivot points

is downward, the market is bearish.

- levels of entry and exit the market: a forex trader could put a limit to his orders every time the price goes beyond the resistance level. Similarly, you can set a stop-loss when the support level is exceeded.

Each time a currency pair reaches the resistance level, it's very likely you should sell the pair and stop just above the

resistance level. Each time the currency pair reaches the lowest support level, it's very likely you should buy the pair and stop below the support level.

The following are some suggestions that should be stored:

- When the price is at the Pivot point level, it's likely a return to the first resistance level or the first support level.

- When the price is at the first resistance level, it's likely a move to the second resistance level or a return to the Pivot point.

- When the price is at the first support level, it's likely a move to the second support level or a return to the Pivot

- When the price is at the second resistance level, it's likely a move to the third resistance level or a return to the first resistance level.

- When the price is at the second support level, it's likely a movement to the third support level or a return to the

first support level.

Pivot points appear to be a perfect indicator to predict the market trend, but it's not so. Sometimes the price hangs near pivot points, making it difficult to predict what will be the next movement. In other cases, the price does not even reach the Pivot points line. Therefore, the Pivot points strategy is not foolproof and you must be very careful.