Forex trading is sometimes an art and sometimes a science. The art part of it comes from the fact that many people use indicators in terms of news as to when they want to make their trade. Economic news that projects a lowering in one type of currency or a strengthening or another are the kinds of news items that people love when it comes to the art of Forex trading.
The science of Forex trading is quite a bit more quantitative in nature for obvious reasons and if you want to get really quantitative, there is no better strategy to do so than the pivot points. What are pivot points exactly? Read on to find out!
Pivot Points
A pivot point is basically a value around which it is expected that trends will reverse or breakout and therefore it is a point of a lot of importance around the quantitative day trading that many people do. The idea is to use the numbers for the previous day to calculate the different values that will be of importance in the area and therefore use those calculated numbers to make the trades for that specific day.
Calculating the Pivot Points
There are seven values that need to be calculated. The pivot point itself and then three support levels for the pivot point as well as three resistance levels for the pivot point. The data for the previous day is used in this and the main thing to keep in mind is that all four values from the previous day (open value, close value, high value, low value) are used in calculating the seven values.
Using the following variables…
O = open price from previous day
C = closing price from previous day
H = high value from previous day
L = low value from previous day
Calculate the pivot point (PP) first…
PP = (H + C + L) / 3
Then calculate the first support and resistance levels (S1 and R1)…
S1 = 2PP – H
R1 = 2PP – L
Then calculate the second support and resistance levels (S2 and R2)…
S2 = PP – (R1 – S1)
R2 = PP + (R1 – S1)
Then calculate the third support and resistance levels (S3 and R3)…
S3 = L – 2(H – PP)
R3 = H + 2(PP – L)
And you have your seven values to use for the day’s trading.
Applying the Pivot Points
There are literally an infinite number of ways that you can apply the pivot point and the support and resistance levels in relation to the pivot point. The only set rule for you to keep in mind is this; if the opening price for the day is below the pivot point, then your preference should be towards sell/short trades whereas if the opening price for the day is above the pivot point, you should be looking primarily for buy/long trades.
Aside from that, try to use the points and lines as indicators of where you should place your stop loss and profit objectives whenever you enter a trade.
