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Pivot Point, PP set the level in Forex, around which price moves. In other words, it is the level, from which price bounces to move to a certain direction. Let's consider Pivot Point formula.
Pivot Points method is widely used in Forex and was developed by John L. Person in 2007 for intraday trading. The purpose of this method is to find future resistance and support levels judging by prices of the last candle.
Pivot Point Formula:
PivotPoint=(High+Close+Low)/3
R1=2∙PivotPoint-Low
R2=Pivot Point + (R1 - S1)
R3=High + 2∙(Pivot Point - Low)
S1=2∙PivotPoint-High
S2=PivotPoint-(R1-S1)
S3= Low - 2∙(High - Pivot Point)
where:
High - Maximum price of bar;
Low - Minimum price of bar;
Close - Close price of bar;
R1,R2,R3-1st,2nd and 3rd resistance levels;
S1,S2,S3-1st,2nd and 3rd support levels.
Thus, we get 7 levels, which will be probably noticed by price. More often, PP is put on daily, weekly, and less often in monthly periods. It is important to remember that chart period must differ from indicator's period for at least 1 step, otherwise chart will just show points instead of support and resistance levels.
How to interpret obtained levels?
If market opens below Pivot Point, bear day is expected and, on the contrary, when market opens above PP, bullish behavior is expected. If within the first day price crosses pivot point, tendency will change direction with a high probability, but it is not always like that. The next significant levels after PP are R1 and S1 (resistance and support respectively), which are used to enter position. R2, R3 and S2, S3 are the levels serving to closing of positions. Location of price within these boundaries says about market being oversold or overbought.
Let's consider a small example of PP work on the chart:
Pic. 1 – Pivot Points method
Conclusion
Main feature of PP operation: upon reaching any level, price moves to the next or bounces to the previous. Advantage of this method is the possibility to calculate pivot points for the next day and define price direction knowing Close, High and Low of present day. Drawback of this method include the following:
- Price can cross level several times a day confusing about break up or bounce of price;
- Working pivot must be calculated on the basis of your main time frame
There are a lot of options for building pivot points: Floor pivot points, Woodie’s pivot points, Tom DeMark’s pivot points etc. Every trader can easily select the most suitable method based on employed trading system.
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