Pivot Point Trading in Forex

Pivot points strategy was initially used by the floor traders. It has been in the forex world for quite sometime now. Floor traders could use this technique to easily get an idea of the future market movements, based on simple calculations.
Pivot point is actually the point or level where the market changes course for the day. Pivot point calculation involves plain mathematical estimations on last day’s high, low, close to get a series of point. The points so arrived at can decide important support and resistance. Pivot level thus includes the support, resistance and the pivot points calculated
Pivot points are favored by most traders mainly because of the ease of calculation as also because they can be very analytic. Using previous day’s information traders can assess the potential points for the coming day(s). And since pivot points are used by a large number of traders, it is frequently found that the market really shows reactions at those points. Pivot points are used on a large scale by the traders hence pivot point calculation can give suitable opportunities for trade.

Pivot points are generally calculated using these formulae
PP = (HIGH + LOW + CLOSE) / 3
S1 = (2 * PP) - HIGH
S2 = PP - RANGE
S3 = S2 - RANGE
R1 = (2 * PP) - LOW
R2 = PP + RANGE
R3 = R2 + RANGE

Where PP=Pivot points=Support, R=Resistance.
The above classical calculation uses high, low, and close from the regular trading hours sessions. They are thus based on the original time frame used by floor traders.
There are lot of variation and newer versions of the formulae as well. Most of them incorporate an average of the prices set of the last days high low, open and close and the current day’s open.
The above classical formulae help us calculate the most common support and resistance levels.