Forex trading is a risky and high paced way to participate in the financial market, and those who are into it rely mostly on the price charts of currencies for determining the time to buy and sell. Forex pivot points are one of those several chart driven strategies that most of the traders use to make predictions on the future turning point in exchange rates. These are called as pivot points because at these price level prices may reverse or pivot during a trading day.
These points are calculated mathematically based on the low, high and closing prices of the previous day. They are calculated as daily, weekly or monthly pivots, it provides the significant points of resistance or support that you can use for good continuation or reversal setups as well as profit targets or stop loss positioning. Lots of traders make use of the Forex pivot points in their daily trading, and it has proved itself highly effective. Most popular pivot points used by the traders are; Floor, Woodies, Camarilla, and Tom Demark’s pivots. Here we are going to explain you to calculate the pivot points, knowing it will certainly help you to get more acquainted with generic technical analysis.
- First of all open the price chart of any Forex currency instrument which you want to trade, you can use the Forex charting software for creating the chart.
- Analyze the chart and identify the three factors, lowest (L), highest (H), and closing (C) prices that you will be using to calculate the Forex pivot points. These points represent the current day’s pivot points, the last trading price of the previous day is considered as the closing point.
- Now find out the average of all these prices, it is just simple average calculation which you may get through this equation: (H+L+C) /3, where L, H, and C denotes the lowest, highest, and closing prices respectively. This average will be the main pivot point and other Forex pivot points will be based on this.
- Now Double the pivot number that you have calculated in the previous step, then subtracts the lowest price of the previous day from it. It will give you the “R1” the first resistance level above the main pivot point. The prices may reverse at this price as they approach from both directions.
- To calculate the second resistance pivot point (R2) you need to find a full price range of the last day and add it to the main pivot point. In simple words the calculation goes like this: [R2 = (H – L) +main pivot point].
- The third resistance level can be found through this simple equation; [R3 = 2* (main pivot point – L) +H].
- Now it comes to the calculation of support levels, to find the first support level S1 you can calculate it by this equation [S1 = (2*main pivot point) -H]. These support levels can act as the reversal point during the trading day.
- Again the second support level S2 is calculated as [S2 = Main pivot point – (H-L)].
- Similarly, S3 = L-2* (H-main pivot point)
That’s it, you have calculated the fores pivot point easily, isn’t it simple! It is used widely among the Forex traders, sometimes they works sometimes they don’t. Since there are 7 levels including 3 resistance levels, 3 support level and one main pivot point, any one point might be accurate while others may fail. You can see that the chances of success are not very high, so you should be cautious when you are trading completely based on these Forex pivot points.