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Forex Pivot Point Indicator
What Is a Pivot Point?
A pivot point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the intraday high and low, and the closing price from the previous trading day. On the subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.
How to Calculate Pivot Points
The pivot point indicator can be added to a chart, and the levels will automatically be calculated and shown. Here's how to calculate them yourself, keeping in mind that pivot points are predominantly used by day traders and are based on the high, low, and close from the prior trading day.
If it is Wednesday morning, use the high, low, and close from Tuesday to create the pivot point levels for the Wednesday trading day.
- After the market closes, or before it opens the next day, find the day's high and low, as well as the close from the most recent previous trading day.
- Sum the high, low, and close and then divide by three.
- Mark this price on the chart as P.
- Once P is known, calculate S1, S2, R1, and R2. The high and low in these calculations are from the prior trading day.
What Do Pivot Points Tell You?
Pivot points are an intraday indicator for trading futures, commodities, and stocks. Unlike moving averages or oscillators, they are static and remain at the same prices throughout the day. This means traders can use the levels to help plan out their trading in advance.
For example, traders know that if the price falls below the pivot point they will likely be shorting early in the session. Conversely, if the price is above the pivot point, they will be buying. S1, S2, R1, and R2 can be used as target prices for such trades, as well as stop-loss levels.
Combining pivot points with other trend indicators is common practice with traders. A pivot point that also overlaps or converges with a 50-period or 200-period moving average (MA), or Fibonacci extension level, becomes a stronger support/resistance level.
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