It’s hard to fly when you can’t properly gauge your altitude. Pilots rely on instruments to measure how high or low they’re flying, particularly in cases where weather may prove challenging or dangerous. We can take this scenario as a metaphor and transfer it over to the currency markets.

In the currency markets, there are so many factors–from monetary and fiscal currents to geopolitics and global trade–that can affect weather conditions. You won’t be able to keep track of every change that occurs but you can measure altitude in relation to price events that either have occurred or are just unfolding.

One way to do this is to set daily pivot points to contextualize your short-term trades for the day and also you can set it accordingly for a week.

What is High or Low in Pivot Point?

Price action can be taking place simultaneously higher or lower depending on the context–compared to an indicator, historical price action, fundamental valuations pertaining to the base or quote currency, or a country’s place in the Big Mac index. It can be higher or lower depending on forward valuations, forecasts in the international trade environment, or expectations of central bank actions.

The point here is that there are a lot of possible reference points–and all of them are subject to change as the economy, like the market, is a dynamic beast.

As a forex day trader or swing trader, you may need a reference point that’s a bit more “fixed,” understanding that you’ll adapt to fluctuations as they occur around your fixed reference points.

And that’s why you might consider contextualizing your week using pivot points to help guide your short-term trading decisions. Before we jump into demonstrating application, let’s first go over the basics of pivot points, especially for those who may be less familiar with them.

Pivot Point Calculation

Let’s now discuss the way each of the five pivot points is calculated. First, we need to start with calculating the basic pivot level (PP)– the middle line.

PP Calculation

Below is the formula you should use to determine the PP level on your chart:

Pivot Point (PP) = (Daily High + Daily Low + Close) / 3

R1 R2 S1 S2 Pivot Levels Calculation

Now that we know how to calculate the PP level, let’s proceed with calculating the R1, R2, S1, and S2 pivot levels:

R1 = (2 x Pivot Point) – Daily Low

R2 = Pivot Point + (Daily High – Daily Low)

S1 = (2 x Pivot Point) – Daily High

S2 = Pivot Point – (Daily High – Daily Low)

R3 S3 Pivot Levels Calculation

We are almost done with the pivot point calculation. There are two more levels to go – R3 and S3.

R3 = Daily High + 2 x (Pivot Point – Daily Low)

S3 = Daily Low – 2 x (Daily High – Pivot Point)

See that the formulas for R1, R2, R3, S1, S2, and S3 all include the PP value.

This is why the basic pivot level is crucial for the overall pivot point formula. Therefore, you should be very careful when calculating the PP level. After all, if you incorrectly calculate the PP value, your remaining calculations will be off.

We have gone through the calculations above so that you can understand how these levels are calculated. We will now discuss some quick ways to calculate pivot points without having to do the manual calculations daily.

How to add Pivot Points in your Platform for Daily Trade

When you apply the basic pivot point and the three support and resistances, there will be 7 different levels. As you have seen above, it can be a bit tedious to perform the calculations manually. You can use MT4 or MT5 indicators to trace the pivot point easily or there are different options to get the pivot points without doing the calculation above manually.

There are many online pivot point calculators on the net. When you open a pivot point calculator, you will be required to add the three price action variables. These are the daily high, the daily low and the close. When you add these three, you will simply click on a “calculate” button and you will instantly get your pivot points. Once you have that, then you could just plot the pivot lines on your trading chart within your trading platform.

Trading Pivot Points

There are few basic rules when trading pivot points.

• Be bearish when the price is below the main pivot point.
• Be bullish when the price is above the main pivot point.
• Go long if the price bounces from S1, S2, or S3.
• Go short if the price bounces from R1, R2, or R3.

 

Have a look at the image below:

Since we have discussed the structure of the pivot points and the way they are calculated, it is now time to demonstrate pivot trading using some chart examples.

Conclusion

Pivot levels provide reference points, and using them on a daily and weekly scale can help you measure the proverbial altitude of price action over the entire week. Pivot points can help you gauge not only potential overbought and oversold areas, but also profit targets and entry levels. As we’ve demonstrated above, chart patterns take priority over pivot levels when it comes to trade signals. Pivot points are fixed, so be sure you’re monitoring the larger technical and fundamental context so that you can adjust to trading conditions, using your pivot points as a fixed point of reference.

You can calculate pivot point easily using winstone prime pivot calculator tool.

Happy trading!!