Pivot Point Trading In Forex Trading

by : rsbombard

Pivot points are some of the exciting trigger points for traders to enter positions in forex market as well as equity trading, although this is more or less extensively used in forex market. Calculating the pivot points is pretty simple and makes the trading day an eventful one if you got your calculations right.

So what is a pivot point? Quite expectedly the pivot point is one at which the market changes its direction for the day.

How to Calculate Pivot Points?
Use the simple formula for calculation:
Pivot point for the day = High (previous) + Low (previous) + Close (previous)
In short pivot point for the current day equals the average of high, low and close values for the previous day. Once having calculated the pivot point, you need to find out derivatives like three supports and resistance levels each for the current day. Here are the formulae to use for the purpose.
R3 = High + 2*(Pivot - Low)
R2 = Pivot + (R1 - S1)
R1 = 2 * Pivot - Low
S1 = 2 * Pivot - High
S2 = Pivot - (R1 - S1)
S3 = Low - 2*(High - Pivot)

So you have 7 points all put together; 3 resistances and 3 supports and one pivot point. Most of the action is going to be around S1, R1 and pivot points for the day. This is because by the time market could reach R2, R3 or S2, S3 it will already be over bought or sold.

Going forward, it would be invitation for going short if the market opens below the pivot and long if it is other way round. However, real world strategies differ hugely from this ideal situation.

Trading Strategies Using Pivot Points
There are several strategies for the vivid day trader who can use the pivot point. Some of them are rather simplistic while others are advanced where one needs to consult additional indicators such as MACD.

Basically, at every support levels and resistance levels, if the rend reverses you have the chance to enter long positions or short positions and put stop-losses at the preceding low or highs respectively. Some times the market pulls back from a support which is a signal for short entry. This trend continues for quite some time if, at that point the MACD is in a selling mode.

It is prudent for the trader to refer back to MACD at critical stages before entering into positions.