forex
Intermediate
Forex Charting

Lesson 2: What Are Pivot Points?

Module 2: Chart Indicators
Date Published: April 17, 2024
Last Updated: May 14, 2024
2 Minutes
Lesson Overview
What Are Pivot Points?

When analyzing the market, you must follow objective data to ensure you’re making an informed decision. One known indicator that’s known for providing just that is pivot points.  

In its most basic form, pivot points are the indicators used to identify the market trend over the specified time frame. Specifically, it shows the market level when the asset is expected to experience its support and resistance.  

Lesson Highlights

  • Looking at the pivot points is essential in foreseeing the possible price movement of the market based on the previous support and resistance levels.
  • To calculate the pivot points for the following day, a trader must use the high, low, and close levels from today’s market data.

Definition of Pivot Points 

In the financial market, the pivot points are used by technical traders as an intraday indicator. Technical traders use pivot points to identify the possible movement of the asset or a currency pair using its support and resistance. 

It identifies market trends and reversals by looking at potential support and resistance levels and the expected market direction the asset may thread. 

But what’s the basis for these indicators?  

It uses historical market data, specifically from the prior trading day. The pivot points are programmed to estimate the future support and resistance levels through the asset’s previous high, low, and close level.  

Pivot Points Terms 

As you’ve noticed above, five (5) essential trading terms are highly related to pivot points. These are the assets’ high, low, close, support, and resistance levels.  

  1. High represents the highest price point that the asset has reached from the previous day.
  2. Low indicates the lowest market price level from the previous day.
  3. Close shows the closing price of the asset from the prior day.  
  4. Support Level (S1 or S2) presents the level at which the asset struggles to fall below. When the market reaches the support level, it’s expected to experience an upward trend. 
  5. Resistance Level (R1 or R2) shows the level the asset struggles to rise above. In other words, the market will experience a downward trend once it reaches resistance level.  

How To Calculate Pivot Points 

When you plug the pivot points into your price chart, the level will be automatically calculated on your behalf. But it would never hurt to be familiar with how it is calculated, so here’s your guide: 

Formulas for Pivot Points 

When you calculate the pivot points, you need the following data: the Pivot Point, the first and second Resistance Levels, and the first and second Support Levels. 

Calculation Process

Formula

Pivot Points (P) CalculationP= (High + Low + Close) / 3
1st Resistance Level (R1) CalculationR1= (Pivot Point x 2) – Low
1st Support Level (S1) CalculationS1= (Pivot Point x 2) – High
2nd Resistance Level (R2) CalculationR2= Pivot Point + (High – Low)
2nd Support Level (S2) CalculationS2= Pivot Point - (High – Low)
3rd Resistance Level (R3) Calculation R3= High + 2(Pivot Point – Low)
3rd Support Level (S3) CalculationS3= Low – 2(High – Pivot Point)

Assume today’s (Tuesday) trading session just ended, and you want to calculate the pivot point levels for tomorrow (Wednesday). You need to use the high, low, and close levels from Tuesday’s market data.   

Once the pivot point value is known, you can calculate the potential support (S1, S2, S3) and resistance (R1, R2, R3) levels using the high and low data from the previous trading day. 

 

In this lesson, you’ve learned the concept of the pivot points and how objective data helps you identify the potential market movement. For the next lesson, you’ll be introduced to the three other types of pivot points and how to use them.