Forex Pivot Point Indicator

Posted February 18, 2010 By admin

Trading Pivot Points in Forex Market

Conduits, which are typically used to predict the direction the Forex market is during the day.

By using a simple mathematical formula to find the point where the general trend in price changes, traders can take advantage of the free movement of price either up or down. They can use it as a gauge to determine which direction they should take to sell a currency that is declining, or buy a currency which is in rise.

Originally trading pivot points were limited to floor traders. Its simplicity and directness made it an attractive tool for floor traders as it allowed them to determine in which direction the market was on track during the day. The formula is simple, without advanced math skills are necessary.

The most common method for calculating pivot points is a simple five point system. This system consists of a mathematical formula that exploits the high, low and close to the previous day, along with two resistance levels and two levels of support. The formula is relatively simple:

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)

In this equation, let:

R = resistance levels
S = support levels
P = pivot
H = high
L = Low
C = close
O = open

It should be noted that the calculation of high, low and close, the New York closing time, which is 4 pm (EST) are normally used in Forex and other markets 24 hours.

Remember the sequence of operations when solving these equations: solve parentheses exponents first, second, multiplying the third, fourth division, in addition to the fifth and sixth subtraction.

A variant is quite common among Forex traders is to add another formula for the five point system.

P = ((day O) + (H + L + C)) / 4

There are many websites that feature pivot calculators. This is good news for Forex traders who are opposed to making their own calculations. These calculators simply require some information is entered then perform all the calculations to find the fulcrum.

Pivot points can actually serve two purposes. They may indicate a general trend in the market. An aggressive market will break the pivot point price in an upward motion. A bearish market does just the opposite.

But they are only effective for one day, which makes them short-term trend indicators. In the following days they will be recalculated. Turning points are also useful for entering and exiting the market.

Trading pivot points can be a very useful exercise for the Forex trader. These few, simple calculations can be done quickly, and can demonstrate a level that has a high probability of causing price movement.

However, success pivot points based on the trader ability to use them effectively with other technical indicators such as MACD. When used in connection with such indicators is an increased probability of success.

About the Author

Dave Hikade began trading over 10 years ago and offers a FREE Forex Trading Newsletter:

http://www.forex-trader-basics.info

For more information on Forex Pivot Points go here:

http://dachsales.com/rec/pivotpoints