In this post, we are going to discover how to calculate pivot points in forex trading for high probability trade setups, more profit potential, and to better time our entry and exit points.
When trading the forex market, pivot point analysis is one of the easiest technical analysis tools you can use in your trading arsenal to determine your daily, weekly, and monthly range of trade for any particular currency pair.
That is why, for newbie traders and professionals alike, we often encourage one to learn how to use pivot points in forex trading.
When rightly used, pivot point trading has the enormous potential to help you make better trading decisions, give you high probability trade setups, and help multiply your profits over time in your trading career.
In this post, we are going to show you how to calculate pivot points in forex and how to use it to determine significant daily, weekly, and monthly support and resistance levels for any currency pair.
How to Calculate Pivot Points in Forex
Most charting software nowadays provides you with an online pivot point calculator but as a technical analyst, it is in your best interest to know how these levels/numbers were derived and how to effectively calculate these pivot point levels for your trade analysis.
Therefore in order to use pivot points with confidence, the first thing you are going to learn is how to calculate pivot point levels.
To start with, forex pivot points and their corresponding levels are derived by using the last trading session’s open, high, low, and close. And since the FX market is a 24-hour market, most forex traders and investors prefer to use the New York closing time of 5:00 pm EST as the previous day’s close.
At the end of the New York trading session, these traders and investors simply take a look at the previous session’s high, low, and closing price to find the pivot point for the next day, and so should you!
Pivot Point Calculation
Learn how to calculate pivot points in forex with the help of this handly pivot point calculation formula.
To calculate forex pivot points, the following steps are taken;
Pivot point (PP) = (High + Low + Close) / 3
That is, to calculate the pivot point value of any given currency pair, at the end of the trading session, we simply identify the highest, lowest, and closing price of the currency pair, sum up the values together, and divide it by 3.
Once this value has been determined, we can now calculate the corresponding support and resistance levels off the value of the pivot point using this formula;
The first level of support and resistance otherwise knowns as R1 and S1
That is, two times the value of the pivot point, minus the lowest price point of the day.
That is, two times the value of the pivot point, minus the highest price point traded for the day.
The second level of support and resistance otherwise knowns as R2 and S2 is equally calculated as follows;
That is, the value of the pivot point, plus the value of the (highest price point – lowest price point)
That is, the value of the pivot point, minus the corresponding value of the (highest price point – lowest price point).
In like manner, the third level of support and resistance otherwise knowns as R3 and S3 is equally calculated as follows;
That is, the value of the highest price point traded for the day, plus the value of (pivot point – lowest price) multiplied by 2.
That is, the value of the lowest price point traded for the day, minus the value of (Highest price – Pivot Point) multiplied by 2.
To calculate the pivot points of any of your chosen pairs, you can use a simple program like the Microsoft Excel Worksheet for your everyday trade analysis just like this pivot point calculation excel sheet for Volatility 75 Index.
On the other hand, if you hate algebra, that should not stop you from using pivot point analysis in forex trading because you mostly don’t need to perform these calculations yourself!
Most charting software will provide you with a pivot point indicator that will automatically do these calculations for you. But right now, you’re ahead of the pack because you now know how these values are calculated and derived.
Just make sure you configure your settings so that it uses the correct closing time and price.
Here is an example of values derived from a pivot points indicator for EURUSD on the 60-min timeframe.
Now, you’ve fully learned how to calculate pivot points in forex trading and how to use it for high probability trade setups.
It’s time to take advantage of using the pivot points strategy in forex trading and incorporate it into your overall forex trading strategy for maximum results.
How do you plan to use pivot point analysis in your forex trading career? Let me know in the comment below.