Pivot Point Trading-A Powerful Method!

Pivot Point Analysis is one of the most robust and proven market analysis method. It works for all types of markets whether stocks, forex, futures, options, commodities or ETFs that have an established range. Range is the high and low of a given trading session.

The high and low are the two most important reference points for a given trading session. The high is a reference point for those who bought out of greed thinking that they were missing an opportunity. Similarly, the low depicts selling out of fear thinking that they would lose by staying in the long trade.

For calculating the pivot points for any trading session, we use the High (H), Low (L) and the Close (C) of the previous session.

Pivot Point P = (H+L+C)/3

Resistance R3=H+2(P-L)

Resistance R2= P+H-L

Resistance R1=2P-L

Support S1 =2P-H

Support S2 =P-H+L

Support S3 = L-2(H-P)

Since there is no formal open and close in the forex market, we can take the NY Bank Settlement at 5:00 PM EST as the close of the daily trading session and 5:05 PM EST as the next day's trading session open. It is rare to find the daily trading session go beyond the R2 and S2 levels.

R3 represents extreme bullishness in the market usually caused by news driven price shocks. R2 level is where the market usually experiences significant resistance and this level provides an exit target for long positions. In bearish market conditions, prices will tend to come close to R1 but most times will fail.

Similarly in a bullish market S1 is important while in a bearish market S2 is important. S3 rarely comes into play and is only effective in an extremely bearish market caused by a news driven event.

Feeling analysis paralysis due to information overload? Read the next article to discover how to filter this information overload!


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