Pivot points may have started as an advanced tool for equity and futures exchange, it is now a widely used tool in the foreign exchange market (forex); making pivot point forex a must for all forex traders.
The pivot point forex technique is best suited for the forex markets since trading is usually with currency pairs that are very liquid (easy to trade) and there exists a large market.
When setting up a pivot point forex, we are looking at the support and resistance of the currency pair. The support level is the lowest level (trade value with another currency) the currency will reach based on past values. The resistance will be the highest trade value of that currency with another currency. It is important to know the support and resistance values for a currency pair since it becomes more probable as the trade value approaches the support and/or resistance level that there will be a pivot.
The formulas for calculating support and resistance levels are based on previous day(s) highs and lows of the currency; hence, these are predictions of what will happen and are not definite. However, the percentages are good that these calculated support and resistance levels will not be crossed most of the time.
The past currency trading pair values that are of most concern for creating the pivot point forex is the previous high, low and closing values-sometimes opening value is also used. The most common formula is the sum of the high, low and closing values divided by three.
Pivot point = (High + Low + Close)/3
This pivot point forex value is then utilized in any number of widely used formulas for creating predictions for the currency pair.
What past values that are used for the pivot point forex calculation will depend on the type of forex trading; is it daily trading, swing trading (weekly cycles), or position trading (monthly cycles).