Pivot points

Welcome to the Advanced technical analysis course. In these lessons, we're going to cover some additional indicators, tools and patterns you can use to find opportunities. Let’s start with a useful way of finding support and resistance levels: pivot points.

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 the Dow Jones as an example.

The Dow 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 the Dow at its current price.

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 the Dow 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 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:

1. Find the high, low and closing prices for the previous day, week or month
2. Add them all together, and divide the result by three
3. Highlight this price on your chart as P

The maths 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