Pivot Point Calculation in Forex Trading
There are many ventures in life where keeping it simple is all that is needed to succeed. Forex trading is one of them. Too many times, Forex traders go searching for Forex systems and Holy Grail signals that employ all manners of indicators without paying attention to some of the price levels in a currency pair that define risk. Currency movements do not move in a straight line like we see in the straight-line graphs of Mathematics. Rather, movements tend to be in a convoluted manner, with prices advancing, retreating and perhaps advancing again or retreating further. Even when there is a clearly defined trend, there are moments when the price action will surely take a breather as traders take profits or some event occurs to re-define market sentiment.
Breather points for profit taking or price levels at which market sentiment can be re-defined are usually determined by points considered as supports and resistance points, and support and resistance in Forex are defined by price levels known as pivot points.
Originally used in the futures markets, pivot points found new application when currency trading commenced and went on to become the biggest financial market. Pivot points give a great degree of accuracy in terms of defining support and resistance levels when they are well plotted by the trader. Indeed, the enhanced liquidity of the Forex markets makes the use of pivot points even more suitable for traders.
Pivot point formula:
Central Pivot point for the day = (Previous day’s high + Previous day’s low + Previous day’s close) / 3
Once the central pivot point is determined, it can then be used to calculate estimated support and resistance for the current trading day.
For resistance levels (R1, R2 and R3)
R 1 = (2 x central pivot) – previous day’s low
R2 = (central pivot – S1) + R1
R3 = (central pivot – S2) + R2
For support levels (R1, R2 and R3)
S1 = (2 x central pivot) – previous day’s High
S2 = central pivot – (R1 – S1)
S3 = central pivot – (R2 – S2)
The problem with the use of pivot points by traders is usually in the plotting of pivot points on the charts. Pivot points are only valid for a day because they have to be calculated from the previous day’s high, low and closing prices, which never stay the same for two days on end for a liquid market like the currency market. Calculating the pivot points everyday is a dreary exercise. Many traders soon get tired of doing it and stop using pivot points altogether.
Another issue is that the trader must be able to determine with precision, what the previous day’s relevant values are. This can be done from the previous day’s candle on the daily charts, but believe it or not. Many beginners are not aware of this. When I started off, I remember using the 1 hour charts to do this, and it was simply not fun. I was never taught that there was anything like a daily chart, and it took sometime and more acquisition of knowledge on my part to get this right. Many newbie traders still have this problem.
However, there is a new and stress-free way of getting your pivot points. It is in the form of a custom indicator that does the calculation and plots the pivot points on the charts for you no matter the time frame you are using. They are:
- Pivot Point indicator for Metatrader 4
- Pivot Point Calculator for your PC
- All-in-one Forex calculator for your PC
Pivot Point indicator for Metatrader 4
Displays Pivot Point levels directly on your chart. You can download Pivot Point indicator for free here. After the downloading is finished you need to copy the file (ex4) to the indicator’s folder where your terminal is installed. Open the MT4 client folder, then go to “experts” à indicators and upload the indicator there. Close the MT4 platform if it is open and reopen it. You will see the indicator right there in the “Custom Indicator” folder.
Pivot Point Calculator (Support and Resistance Calculator) for PC
Want to determine support, resistance and Forex market turning points on your PC? Download now free version of Pivot Point calculator for PC.
All-in-one Forex calculator
A small, easy to use and powerful software what helps you to calculate pivot points, Fibonacci, Woodie and Camarilla points. You can download it here.
These Forex tools are free, enjoy them and involve others!
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Image source: flickr.com