What are Pivot Points

A pivot point is the point at which the end of one elevation becomes the beginning of another elevation. Pivot points are also known as points of possible reversal entry points. Pivot points are commonly used in combination with candlestick charts. Using pivot points and technical analysis together is the one of the methods of financial risk management in Forex.

On any given trading day, Pivot Points are the price levels that will most likely form the levels of support and resistance. Technical analysis is one of the keys to making best entry and exit decisions in trading; however, one will have to understand trader manipulation of the analysis to bring down the market also if they should be acting the wrong way to artificial situations.

Similar to technical analysis a large number of people are also used to pivot points because they are considered to be pretty influential by majority of the traders. The most widely used formula for calculating pivot points is as follows:

H = day’s high of yesterday
L = day’s low of yesterday
C = day’s close of yesterday

Pivot Point = (H + L + C)/3
Resistance = 2*PP - L
Support = 2*PP - H
Yesterdays last two hour high = L2HrHigh
Yesterdays last two hour low = L2HrLow

The indication of Pivot Points is as follows:

• If the price moves along the known pivot point based on increased volume it is most likely to be continuing in the current trend
• If the price equals the known pivot point, but is not progressing beyond means that the current trend will be reversed.

The following is a summary of Pivot Point indicators:

• When the advancing/declining price signals in a candle stick chart is not moving through the known pivot point after a couple or more tries then there is a good probability that it will being to decline/advance.
• If the trader is waiting for a price to reverse after hitting S/R level then such a trade is known as swing trading.
• In cases where the advancing/declining price has easily moved ahead and has increased in number through known S/R level then there is a good probability that it will continue to advance/decline.
• If the trader is looking for the price to continue to move in the same direction after moving through S/R level, then such a trading method is called breakout trading.

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Written by admin on October 10th, 2008 with comments disabled.
Read more articles on day trading and Forex Trading.

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Disclaimer: Forex trading carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with currency Exchange trading.