Pivot point calculations
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[edit] Forex pivot point calculations
A pivot point calculator is an arithmetic program used by forex traders to anticipate price movements. Pivot points are frequently used by foreign exchange traders as a means to calculate resistance and support levels which are, in turn, used as visual cues to execute trades. Unlike fundamental analysis which relies on such economic indicators as the status of a nation’s unemployment rate, the rise or fall of interest rates, trade balances, and the state of retail sales, pivot point calculations provide traders with visual bench marks which some use to predict price changes.[citation needed]
[edit] Pivot point analysis
Pivot trading (trading between the lines), begins with the calculation of the pivot point which is an average of the previous day’s high, low and closing price.
In the following formula "H" represents the previous day's high, "L" represents the previous day's low, and "C" represents the previous day's closing price.
Pivot Point = (H+L+C)/3
[edit] Resistance and support level calculations
Once the day’s pivot point has been calculated, traders turn to the calculation of the initial resistance (R1) and support (S1) levels which assumes that trading will continue pretty much in the same range as the previous day.
Resistance Level 1 = (2*PP)-L
Support Level 1 = (2*PP)-H
A second set of resistance and support points, R2 and S2, are used in the event that the price breaks through the previous day’s trading range and continues until it meets a second higher level of resistance or lower level of support.
Resistance Level 2 = (PP-S1) + R1
Support Level 2 = PP - (R1 - S1)
[edit] Rationale
Some traders believe that there are two prevailing tendencies in price movements. If a day’s price action begins above the pivot point, prices will tend to stay above that point (fulcrum) until it reaches a resistance point. Conversely, if a day’s pricing action begins below the pivot point, the price will tend to stay below that point until it reaches a support point. A resistance level is a price that tends to prevent further upward movement. A support price is a price action point that tends to prevent further downward movement. It should be noted that none of these beliefs are supported by standard [Random walk] market models.
Typically such a trader, when price approaches a pivot above, waits for a reversal at that point and sells. The opposite is true when price action is moving downward, the pivot trader waits for a bounce off the pivot of support and places an order to buy.
The rationale of this is an attempt to avoid buying high (at R2) or selling at the low (S2).
