Advanced technical analysis
This course covers a useful way of finding support and resistance levels: pivot points.
- What are pivot points?
- Finding support and resistance with pivot points
- Pivot points example
- Calculating pivot points
- Pivot points factsheet
What are pivot points?
Pivot points are a technical indicator that traders use to predict upcoming areas of technical significance, such as support and resistance. They're calculated by averaging the high, low and closing prices of a previous period. That could be a day, a week or a month.
If a market is trading above its previous pivot point (known as P), it is seen as a bullish signal. If it is below, it is bearish.
Day traders often use this as a method of spotting short-term trends. For instance, if EUR/USD is trading above P from the previous day, they may decide that it will continue to climb – and look to buy the pair.
Finding support and resistance with pivot points
However, P isn't just used to gauge today's price action. It also forms the basis of six further calculations to identify possible areas of support and resistance known as:
- S1, S2, S3 for support
- R1, R2 and R3 for resistance
These levels appear on a chart as parallel lines to P and can be used as profit targets or areas to open new positions.
Pivot points example
Let's take a look at another EUR/USD example.
The pair is trading below its previous day's P, which offers a short-term signal that a bear run may be forming. You decide to short EUR/USD at its current rate.
You could aim for S1, S2 or S3 as a profit target. Just like other support levels, these would be seen as stronger if the market has bounced off them before. If S1, S2 or S3 lines up with a previous support area, it could make for a good target.
Alternatively, you could wait for EUR/USD to bounce off support (at, say, S1) and buy the reversal. If you did this, P or R1 might make a good profit target.
Calculating pivot points
You don't need to calculate pivot points manually when trading on the FOREX.com trading platform. To view them on a chart simply log in, select your market and pick 'pivot points standard' from the list of indicators.
However, to work out P for yourself, follow these three steps:
- Find the high, low and closing prices for the previous day, week or month
- Add them all together, and divide the result by three
- Highlight this price on your chart as P
The math behind the S and R levels is a little bit more complex:
R1 = (P x 2) - the previous low
R2 = (P - S1) + R1
R3 = (P - S2) + R3
S1 = (P x 2) - the previous high
S2 = P - (R1 - S1)
S3 = P - (R2 - S2)
Pivot points factsheet
|Predicting bull or bear trends Identifying future support and resistance