A pivot point is a currency pair price that is used by forex traders to predict the likelihood of the market heading one way or the other. Of course, you can never entirely predict the direction, but you can gauge the probability of the direction, depending on where the price is relative to the pivot point.
A pivot point is an average of peripheral prices (high, low, close) that the market hit. It is the middle of the trading range. So imagine that the market is moving up and down within boundaries- the pivot point marks the middle of the band.
Of course the general trend can be up and down, so the pivot points will change value over time. If the market heads above the pivot point it is seen as a bullish sentiment, and if it is trading below the pivot point it is seen as bearish.
You will also generally see marked out next to the pivot points a series of support and resistance points, below and above the pivot point (support below, resistance above), that are calculated from historical trading ranges of the market.
A pivot point and its support and resistance levels are often reversal points for the direction of the market. In a bull market, the pivot point and the resistance levels may be thought of as a ceiling price above which the buyers are scared away from the market. In a bearish session, a pivot point and its support levels may signify a bottoming out or a shying away from further selling.
Types of Pivot Points.
Generally, you´ll see 4 different types of pivot points quoted, that are calculated in slightly different ways. They are: the Standard, the Woodie, the Camarilla and the Fibonacci.
Standard Pivot Points
Standard pivot points are calculated using the previous day’s high, low, and closing price, using the following formulae (just in case there are any egg heads out there!). They are a straight average and measure of the highs and lows of the previous day :
PP = (YHigh + YLow + YClose) / 3
S1 = (PP * 2) – YHigh
S2 = PP – (YHigh – YLow)
S3 = (2 * PP) – ((2 * YHigh) – YLow)
R1 = (PP * 2) – YLow
R2 = PP + (YHigh – YLow)
R3 = (2 * PP) + (YHigh – (2 * YLow))
Woodie Pivot Points
The Woodie’s Pivot Point is calculated using the current session’s open price as well.
R4 = R3 + range
R3 = H + 2 * (PP – L) (same as: R1 + range)
R2 = PP + range
R1 = (2 * PP) – LOW
PP = (HIGH + LOW + (TODAY’S OPEN * 2)) / 4
S1 = (2 * PP) – HIGH
S2 = PP – range
S3 = L – 2 * (H – PP) (same as: S1 – range)
S4 = S3 – range
(Range is the High minus the Low for the session (usually daily).
Camarilla Pivot Points
Camarilla pivot points use a more complicated method of calculation to generate a set of 8 levels of support and resistance and no middle point. They are used frequently in automated Forex trading – so often are a self fulfilling prophecy as autotraders buy in and load off positions.
Camarilla Pivot Points are calculated as follows:
R4 = C + range* 1.1/2
R3 = C + range* 1.1/4
R2 = C + range* 1.1/6
R1 = C + range* 1.1/12
PP = (HIGH + LOW + CLOSE) / 3
S1 = C – range* 1.1/12
S2 = C – range* 1.1/6
S3 = C – range* 1.1/4
S4 = C – range* 1.1/2
Fibonacci Pivot Points
Fibonacci pivot points are based on calculations based on Fibonacci levels. A Fibonacci sequence is a sequence of numbers where each number is the sum of the previous two, so 1,1,2,3,5,8,13 would be a fibonacci sequence. You get Fibonacci sequence all over the place in nature (the original conundrum that Fibonacci investigated in 1202) was how fast rabbits could breed in a perfect world). Many gamblers uses Fibonacci systems at casinos, and…yep- they make a big showing in the trading world as well.
They are pretty complicated and time consuming to calculate. We´d recommend doing it manually once, to understand the theory, and then use a service that generates them.