Get to Know about Pivot Points
Pivot points are very useful concept in forex trading as it is used to predict high and low points of trading of the current day by using previous day high, low and close prices. As we know that there are many ups and downs in prices of currency in forex market so graph of forex market has a zigzag pattern. Point from where price starts moving up is known as support and when it reaches a point after which it again starts moving down, that point is known as resistance. These points are collectively known as pivot point. Market is rejected at these points i.e. either currency will be sold out if it is resistance or bought if it is support.
Consider an Example. If forex market starts with price $1180 at 10 a.m. for EUR/USD and price starts moving up. After reaching up to $1200 2 p.m. price starts falling then this point ($1200 price at 2 p.m.) creates a resistance point. Similarly if currency price falls till $1188 at 4 p.m. then again starts moving up then point ($1188 at 4p.m.) creates a support point.
These points can be calculated through below formulae:-
Pivot Point = (High of previous day + Low of previous day + Close of previous day)/3
Resistance 1= (2*Pivot Point) – Low of previous day
Support 1= (2*Pivot Point) –High of previous day
Resistance2= (Pivot Point-Support1)+Resistance1
Support2=Pivot Point – (resistance1-support1)
Resistance3= (Pivot Point –Support2) + Resistance2
Support3 = Pivot Point – (Resistance2-Support2)
These formulae are just for the sake of knowledge. Now many online pivot calculators are available for this calculation.
Support and resistance level: - support level and resistance level are defined by lines in graphs having same value of price as support and resistance points respectively.
These levels can be used to decide when to buy and sell stock. Trader can buy stock when resistance level is reached and sell in case of support level.
How to choose which support and resistance level to use: - As there is more than one Support and resistance level so there is always a dilemma to find which support and resistance is more reliable.
For example, if a seller sells stock after reaching resistance level 1 (considering above fig.) assuming that prices will fall after this level then it would not be a great deal for seller as price rises till resistance level 2 after a significant drop in price.
Support level which is going to be used for making decision of buying stock should include at least two rejections. Resistance level which includes at least three rejections should be used for decision making.
Consider an Example. If forex market starts with price $1180 at 10 a.m. for EUR/USD and price starts moving up. After reaching up to $1200 2 p.m. price starts falling then this point ($1200 price at 2 p.m.) creates a resistance point. Similarly if currency price falls till $1188 at 4 p.m. then again starts moving up then point ($1188 at 4p.m.) creates a support point.
These points can be calculated through below formulae:-
Pivot Point = (High of previous day + Low of previous day + Close of previous day)/3
Resistance 1= (2*Pivot Point) – Low of previous day
Support 1= (2*Pivot Point) –High of previous day
Resistance2= (Pivot Point-Support1)+Resistance1
Support2=Pivot Point – (resistance1-support1)
Resistance3= (Pivot Point –Support2) + Resistance2
Support3 = Pivot Point – (Resistance2-Support2)
These formulae are just for the sake of knowledge. Now many online pivot calculators are available for this calculation.
Support and resistance level: - support level and resistance level are defined by lines in graphs having same value of price as support and resistance points respectively.
These levels can be used to decide when to buy and sell stock. Trader can buy stock when resistance level is reached and sell in case of support level.
How to choose which support and resistance level to use: - As there is more than one Support and resistance level so there is always a dilemma to find which support and resistance is more reliable.
For example, if a seller sells stock after reaching resistance level 1 (considering above fig.) assuming that prices will fall after this level then it would not be a great deal for seller as price rises till resistance level 2 after a significant drop in price.
Support level which is going to be used for making decision of buying stock should include at least two rejections. Resistance level which includes at least three rejections should be used for decision making.