Why Are Pivot Points Enticing to Some and How Do We Calculate Them?

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What are pivot points?

Many people use pivot points when they want to know the possible support and resistance levels. We look for the pivot point’s support and resistance levels because these are the places where the price movement’s direction can change.

Did you know that even the most professional traders and market makers use pivot points? It is because, unlike others, they are objective. They are not based on emotions or their own point of view.

The pivot point and Fibonacci levels

If you are aware of what Fibonacci levels are, then you must know that many people monitor them to the point that they become self-fulfilling and subjective. If you are wondering why we are talking about Fibonacci levels, they have many similarities with pivot points. They only differ in Fibonacci’s tendency to be subjective when selecting the swing highs and lows. We can say that pivot points use the same calculation method, and many traders monitor them as well.

More on pivot points

Most traders find pivot points useful when they prefer short-term trades and maximize small price movement opportunities to gain profits. Typically, traders can choose between bouncing and breaking the support and resistance levels.

  • Traders who are bound to range find pivot points valuable when they are searching for the reversal points. They consider pivot points as ideal areas where they can place either a buy or sell order.
  • Traders who focus on breakouts use pivot points when they want to know the key levels they need to break to classify a move as a real breakout.

Naming some of the most crucial pivot points jargons

  • PP — means Pivot point
  • S — means support
  • R — means resistance

Calculating pivot points

When we calculate pivot points and their support and resistance levels, we use the open, low, high, and close of the previous session. Usually, traders would use the New York session’s closing time (5:00 pm EST) as the previous day’s closing because forex runs 24 hours a day. Let us enumerate the formulas one by one:

Pivot point calculation

  • Pivot point (PP) = (High + low + close) ÷ 3

Support and resistance levels calculation:

  • First level resistance (R1) = (2 * PP) – Low
  • First level support (S1) = (2* PP) – High
  • Second level resistance (R2) = PP + (High- Low)
  • Second level support = PP – (High- Low)
  • Third level resistance = High + 2(High – Low)
  • Third level support = Low – 2( High –PP)

Sometimes, other charting software plots the immediate or mid-point levels. They are mini levels between the pivot point and its support and resistance levels. There is no need for you to calculate this because the charting software will do everything for you. You just need to set the close time and price properly. At least, you have an idea how it is done, or you want to double-check something like how the pivot point behaved previously.

Are pivot points essential?

A lot of traders find pivot points attractive because it is objective and not self-fulfilling. Unlike the others, it is easier to test how the price will react on the pivot points.