Does Pivot Points work in Forex Trading?

Pivot points is a trading technique developed by floor traders, which helped them to see if the price is relative to previous market action.

By definition, a pivot point is a turning point or condition. The same applies to the Forex market, the Forex pivot point is a level in which the sentiment of the market changes from “bull” to “bear” or vice versa.

If the market breaks this level up, then the sentiment is said to be a bull market and it is likely to continue its way up, on the other hand, if the market breaks this level down, then the sentiment is bear, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price can’t break the pivot point, a possible bounce from it is plausible.

Pivot points work best on highly liquid markets, like the spot currency market, but they can also be used in other markets as well. The Pivot point is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.

Does Pivot points work? They work simply because many individual traders and investors use and trust them, as well as bank and institutional traders. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.

Calculating pivot points

There are several ways to calculate the Pivot point. This method were found to have the most accurate results when calculated by taking the average of the high, low and close of a previous period (or session). Pivot point (PP) = (High + Low + Close) / 3 Take for instance the following EUR/USD information from the previous session: Open: 1.2386 High: 1.2474 Low: 1.2376 Close: 1.2458 The PP would be, PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439

What does this number tell us? It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower.

On both cases this condition is likely to sustain until the next session. Since the Forex market is a 24hr market (no close or open from day to day) there is a eternal battle on deciding at white time we should take the open, close, high and low from each session.

From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT. Besides the calculation of the PP, there are other support and resistance levels that are calculated taking the PP as a reference. Support 1 (S1) = (PP * 2) – H Resistance 1 (R1) = (PP * 2) - L Support 2 (S2) = PP – (R1 – S1) Resistance 2 (R2) = PP + (R1 – S1) Where , H is the High of the previous period and L is the low of the previous period Continuing with the example above, PP = 1.2439 S1 = (1.2439 * 2) - 1.2474 = 1.2404 R1 = (1.2439 * 2) – 1.2376 = 1.2502 R2 = 1.2439 + (1.2636 – 1.2537) = 1.2537 S2 = 1.2439 – (1.2636 – 1.2537) = 1.2537

These levels are supposed to mark support and resistance levels for the current session. On the example above, the PP was calculated using information of the previous session (previous day.) This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels.

By doing so we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point in a weekly or monthly basis is mostly used by long term traders, but it can also be used by short time traders, it gives you a good idea about the longer term trend. S1, S2, R1 AND R2.