If you are trading Forex, you will know that it is essential to identify support and resistance levels. These levels inform you as to where the price may stop, reverse or break through. A pivot point calculator is one of the most well-known tools to find support and resistance levels.
In this guide, we will break down what pivot points are, what the pivot point formula for forex is, and how a pivot trading strategy works in plain English. We will also summarise how daily pivot points are calculated and why it is useful for traders to use a support and resistance calculator.
What Are Pivot Points?
Pivot points are specific price levels that traders use to predict where the market might go next. These levels are based on the previous day’s high, low, and close.
After determining these prices, you can find the main pivot point (sometimes referred to as PP). You can also determine the support levels (S1, S2, S3) and resistance levels (R1, R2, R3) once you find the pivot point.
- Support levels are prices where a downtrend may stop going down and possibly go up.
- Resistance levels are prices where an uptrend may stop going up and possibly go down.
You can do these calculations yourself using the pivot point formula forex, or use an online pivot point calculator to get the results instantly.
Daily Pivot Points
The most popular pivot point formation used by Forex traders are daily pivot points. These can form using the high, low, and close of the previous day of trading.
For instance:
- If you were to trade today, you would calculate the daily pivot points using yesterday’s high, low, and closing prices.
- The daily pivot points will stay the same the entire day until the following trading day starts.
- Daily pivot points are very popular with day traders who trade the same day and much of the time show where a price might bounce and break.
Pivot Point Formula Forex
If you want to calculate pivot points manually, you can use the classic pivot point formula for forex. Here’s how it works:
Step 1 – Calculate the Main Pivot Point (PP):
PP = (High + Low + Close) / 3
Step 2 – Calculate First Support and Resistance:
R1 = (2 × PP) – Low
S1 = (2 × PP) – High
Step 3 – Calculate Second Support and Resistance:
R2 = PP + (High – Low)
S2 = PP – (High – Low)
Step 4 – Calculate Third Support and Resistance (optional):
R3 = High + 2 × (PP – Low)
S3 = Low – 2 × (High – PP)
You can repeat this every day to get daily pivot points. But if you don’t want to do the math, you can use a free pivot point calculator online.
Support Resistance Calculator
A support resistance calculator is very close to a pivot point calculator. The two tools can be used to find key levels of potential stop and/or reversal price action.
The only difference is that a support resistance calculator may use other methods (such as Fibonacci retracement) to establish the levels. However, most traders find pivot points to be straightforward and effective.
Using a Pivot Point Calculator
To use a pivot point calculator, you just need three numbers from the previous day:
- The highest price (High)
- The lowest price (Low)
- The closing price (Close)
Once you enter these into the calculator, it will instantly give you:
- The main pivot point (PP)
- Support levels (S1, S2, S3)
- Resistance levels (R1, R2, R3)
Many trading platforms also have built-in pivot point tools, so you might not even need to open a website to calculate them.
Pivot Point Trading Strategy
A pivot point trading strategy is a plan that uses pivot points to decide when to buy or sell. Here are some simple ways traders use them:
a) Range Trading Strategy
When the market is moving sideways (range-bound):
- Buy near a support level (S1 or S2).
- Sell near a resistance level (R1 or R2).
This works because prices often bounce between support and resistance when the market is not trending.
b) Breakout Strategy
When the price moves strongly above or below a pivot point:
- If the price breaks above a resistance level (R1), it may keep going up.
- If the price breaks below a support level (S1), it may keep going down.
Traders call this a breakout and often enter trades in the breakout direction.
c) Combining with Other Indicators
Pivot points work better when you combine them with other tools like:
- Moving averages
- RSI (Relative Strength Index)
- MACD (Moving Average Convergence Divergence)
- Candlestick patterns
Example of Daily Pivot Points
Let’s say yesterday’s Forex prices were:
- High: 1.2100
- Low: 1.2000
- Close: 1.2050
Using the pivot point formula forex:
PP = (1.2100 + 1.2000 + 1.2050) / 3
PP = 1.2050
R1 = (2 × 1.2050) – 1.2000 = 1.2100
S1 = (2 × 1.2050) – 1.2100 = 1.2000
R2 = 1.2050 + (1.2100 – 1.2000) = 1.2150
S2 = 1.2050 – (1.2100 – 1.2000) = 1.1950
So your daily pivot points would be:
- Pivot Point (PP): 1.2050
- Support 1 (S1): 1.2000
- Resistance 1 (R1): 1.2100
- Support 2 (S2): 1.1950
- Resistance 2 (R2): 1.2150
Why Pivot Points Are Useful
Traders rely on pivot points for many reasons throughout the day:
- They are very simple to calculate.
- They provide clear support and resistance levels.
- They work well on the daily, weekly, or monthly timeframes.
- They help traders plan their entry and exit levels.
In addition to using a pivot point strategy, they can allow traders to make decisions with greater speed and well-founded confidence.
Tips for Trading with Pivot Points
- Always check the overall trend before trading. If the trend is up, focus more on buying at support levels.
- Use stop-loss orders to protect yourself in case the market goes against you.
- Don’t rely only on pivot points; combine them with other analysis methods.
- Test your strategy on a demo account before using it with real money.
Common Mistakes to Avoid
Even though pivot points are simple, traders often make mistakes:
- Using them without checking the news, big news events can break through any level.
- Trading every time the price touches a level without confirming with other indicators.
- Forgetting that pivot points are based on past data, so they are not always correct.
Conclusion
A pivot point calculator is a super simple tool to find support and resistance levels in Forex. Once you understand the pivot point formula forex, you can calculate daily pivot points yourself and/or use a support resistance calculator on the web.
Once you learn about pivot points, you can start to develop a pivot point trading plan that suits your trading style. You can refine it to be a short-term trading plan or a longer-term trading plan and then use this information as guide to buy or sell.
The key with pivot points is to practice, keep it simple and trade with good risk management.
