The pivot point and associated support and resistance levels are calculated by using the last trading session’s open, high, low, and close.
Since forex is a 24-hour market, most forex traders use the New York closing time of 5:00 pm EST as the previous day’s close.
Pivot Point Calculation
We show the calculation for a pivot point below:
Pivot point (PP) = (High + Low + Close) / 3
We then calculated support and resistance levels off the pivot point like so:
First-level support and resistance:
The First resistance (R1) = (2 x PP) – Low
First support (S1) = (2 x PP) – High
A second level of support and resistance:
The Second resistance (R2) = PP + (High – Low)
Second support (S2) = PP – (High – Low)
A third level of support and resistance:
The Third resistance (R3) = High + 2(PP – Low)
Third support (S3) = Low – 2(High – PP)
Keep in mind that some forex charting software plots intermediate levels or mid-point levels.
These are basically mini levels between the main pivot point and support and resistance levels.
If you hated algebra, have no fear because you don’t have to perform these calculations yourself.
Most charting software will automatically do this for you. Just make sure you configure your settings so that it uses the correct closing time and price.
Remember, one of the advantages of using pivot points is that it is objective, so it’s very easy to test how prices react to them.
Next up, we’ll teach you the various ways in which you can incorporate pivot points into your forex trading strategy.