Pivot points is a technical indicator that is calculated taking the numerical average between the high, low and closing prices of a given product. Calculating the Pivot Point also allow you to calculate other resistance and support levels.
The Pivot Point itself is the primary support/resistance, once the price brakes this barrier a major movement is expected. If the price goes under the Pivot Point it is considered to be a bearish market if the price goes above the Pivot Point it is considered to be a bullish market with the biggest movement to be done until it reaches the next support or resistance.
The most interesting about pivot points is that it is such a popular and wide spread indicator among traders of all levels, from beginners to professional traders, including those of banks and brokers, that it ends up being a self-fulfilling prophecy.
How to calculate Pivot Points?
You can find several ways to calculate Pivot Points (P). But they all involve the average of the High, Low and Closing points of the previous day. With that you can also calculate another Resistance (R) and Support (S) levels.
R3 = H + 2(P – L) R2 = P + (H – L) = P + (R1 – S1) R1 = (P x 2) – L P = (H + L + C) / 3 S1 = (P x 2) – H S2 = P – (H – L) = P – (R1 – S1) S3 = L – 2 (H – P)
PS1: For 24 hours markets such as Forex we normaly use the NY session closing time at (4 pm EST) on a 24 hour cycle.
PS2:The Pivot Point tend to be the strongest level of support and resistance, once the market have passed this point up or down the next support or resistance should represent the next move, but it loses its strength as it goes further from the Pivot Point.
Trading with Pivot Points
You can implement a series of strategies using the Pivot Points. As they are strong points of resistance you can use to trade on retracements once the price reaches a support or resistance
Definitely a good way to improve the accuracy of the trading with Pivot Points is to combine them with Candle sticks.