Pivot points are a technical forex trading strategy that determine probability of future price action off of previous price movements. The mathematical formula for calculating pivot points is as follows:
Pivot point (PP) = (High + Low + Close) / 3
Support and resistance levels are then calculated off the pivot point as follows:
First level support and resistance:
First resistance (R1) = (2 x PP) – Low
First support (S1) = (2 x PP) – High
Second level of support and resistance:
Second resistance (R2) = PP + (High – Low)
Second support (S2) = PP – (High – Low)
Third level of support and resistance:
Third resistance (R3) = High + 2(PP – Low)
Third support (S3) = Low – 2(High – PP)
Strategy
Using pivot points to help determine support and resistance levels can be a successful trading strategy, as price action is often likely to return to previous levels after consolidation. Dependent on how long you intend to hold positions before taking profit, you will want to calculate pivot points for the proper time period that best match your strategy.
Pivot points can be calculated for any time frame, though some of the most popular include daily pivot points, weekly pivot points and hourly pivot points.
