Pivot Points In Forex - What They Are And How To Use Them

You may hear that one of the handier tools in a forex trader's toolbox is a pivot point calculator. Pivot points are one of the regularly used triggers for trading programs. If you are a newbie investor to the forex market, though, you may be foggy on exactly what pivot points are and what they can mean to your trading.

In a nutshell, pivot points are exactly what they sound like - the point at which the market is expected to turn - if it's been going down, a pivot point is the value at which it will reverse the trend and begin to climb. If it's been increasing, then the pivot point is where the sentiment of the forex traders will reverse and start a downward pattern. Obviously, being able to predict major movements in the money market is a valuable skill, since it hints at the where the market is moving and whether or not this is the time to trade or stick.

Pivot point trading is an especially popular method of mapping out a trading strategy. It was originally utilized by floor traders in the stock market who wanted it because it enabled them to gauge where the market was heading with just a few simple bits of information and calculations. By knowing the high, low, opening and closing points from the previous day, they could calculate a point at which the market had 'turned' to head upward or downward. Pivot points can help predict where the market is going - and coupled with the resistance and support points, give you an idea how far in that direction it will go.

There are a number of methods to calculate the pivot points for the day, but the most usual and easiest is to get the average of the opening, closing and high points for the last day's trading. There are other pivot points that can be calculated from those numbers as well. Before we talk about how to calculate them and what they mean, let's define a few terms:

Pivot point - the point where the forex market reverses a current flow

Resistance - A high point in a market chart that recurs regularly. Generally, it is the pace where the market (or currency) will start a downturn

Support - A low point in the market chart that recurs regularly. Generally, it is the point where the forex market (or currency) will begin to head back up.

Typically, support and resistance paces are hard to break through. Most of the time as the numbers approach that level; there will be a little rebound in the other way. An interesting event is that once a resistance or support point is broken, it tries to switch sides. A broken resistance will commonly turn into a support for prices on the other side of the box.

The most common calculation for arriving at a pivot point is:

Pivot: (High + Close + Low) divide by 3

Resistance: 2 X Pivot - Low

Support : 2 X Pivot - High

USD/EUR Date:02/03/06 14:40 O=0.83174 H=0.83188 L=0.83167 C=0.83188

Given this data for Feb 3, 2006, the pivot points for Feb 4, 2006 would look like this:

Pivot: 0.83180

Resistance: 0.83193

Support: 0.83172

Those digits provide me some points on which to base my strategy for the day. If the market opens above the pivot point, it's a bull market, and most advisors would go for long trades, since the direction of the market is up. If it opens below the pivot point, it is time to favor short trades and quick sales.

There are 2 common sales methods that are based on pivot, resistance and support points.

Breakout Trade: When a currency pair breaks through a resistance or support point, there's usually a surge of happenings all over it. Buy if the charts show a break through a resistance, sell if the rate drops below a support point.

Pullback Trade: When the exchange rate heads back from a high, most forex traders will purchase, based on other info that is there and available. It's a tricky move, though, since the pullback could just be a temporary pause in the upward momentum, or the beginning of a downward rebound.

Using pivot points to make your strategy in day trading is a complex matter. You will see a great deal written about it by different gurus and experts. These basics can help you understand what you're reading from them.