Calculation of Pivot Point is very essential to every Forex and Volatility Index trader.
Technically, as a trader, you need to learn how to to calculate pivot point levels.
Aside the regular online Pivot Points calculator applications that are available nowadays, one must have an idea on how it is being calculated.
However, Pivot Point plus Support and Resistance levels are easily computed by marking the last trading session’s open, high, low, and close.
You are aware that forex runs a 24-hour market, hence forex traders use the New York closing time of 9:00 GMT as the previous day’s close.
Pivot Point Calculation
To calculate pivot point, follow the steps below:
Pivot point (PP) = (High + Low + Close) / 3
You will calculate Support and resistance levels by using the steps below:
For first level support and resistance, same as Support 1 and Resistance 1:
First resistance (R1) = (2 x PP) – Low price
First support (S1) = (2 x PP) – High price
For second level of support and resistance, same as Support 2 and Resistance 2:
Second resistance (R2) = PP + (High price– Low price)
Second support (S2) = PP – (High price – Low price)
For third level of support and resistance, same as Support 3 and Resistance 3:
Third resistance (R3) = High price + 2(PP – Low price)
Third support (S3) = Low price– 2(High price – PP)
By using Microsoft Excel work sheet, you can easily program this steps for your every day use.
Below is an image of Pivot Point computation on an excel sheet for Volatility 75 Index.
Some charting indicators and expert advisors will automatically calculate for you.
Moreover, you will need to configure your settings so that it uses the correct closing time and price.
You can do a little back-testing at your spare time to see how pivot point levels have held up in the past on your chart.
One of the advantages of using pivot points is that it is objective.
You can easily identify and test how price reacted to them in the past.
Formation of Price Reversal Candlestick patterns such as Pin Bars against pivot point, Support and Resistance levels helps traders a lot.
It confirms that price trend will either retrace or reverse.
On the other hand, formation of Price Trend Continuation patterns across Pivot Point, Support and Resistance levels also confirms the trend will continue.
Support Levels:
These are the floor or base levels where price is expected to reach and bounce or rise up.
Support levels such as Support 1, Support 2 and Support 3 always lie below the Pivot Point level.
A break and close of price below Support 1 level will give way to Support 2 level.
At this point, Support 1 will now become a resistance level to Support 2.
While a break and close below Support 2 level will give way to Support 3 level.
At this point, Support 2 will now become a resistance level to Support 3.
Resistance Levels:
These are the ceiling or top levels where price is expected to reach and fall or drop.
Resistance levels such as Resistance 1, Resistance2 and Resistance3 are always above the Pivot Point level.
A break and close of price above Resistance 1 level will give way to an upward movement of price to Resistance 2 level.
At this point, Resistance 1 will now become a support level to Resistance 2.
While a break and close above Resistance 2 level will give way to an upward movement of price to Resistance 3 level.
At this point, Resistance 2 will now become a support level to Resistance 3.
Basically, price will normally continue in the direction it laps on the Pivot point.
The bullish price movement will continue if a Bullish candlestick opens below and closes above a pivot line.
