Pivot points define the horizontal support, as well as resistance lines which are situated on a price chart for the ease of the calculation and creation of charts. There are specific platforms which are supporting pivot points, but in the case of Forex Tigon LTD, manual calculation and plotting must be done.
Pivot levels are calculated while using three various types of data from the previous trading day: High, low and closing prices.
While there may already be other calculation methods for pivot point calculation, the most common one is the five point system. This system uses the previous days’ high, low and closing prices; this is done alongside a support and resistance level(s), making the calculation include 5 points, in order to derive a pivot point; below are the (exemplary) equations:
R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C)/3
S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)
H = High Price
L = Low Price
C = Close Price
S1 = Support 1 – which is (Pivot Point x 2) – Yesterday High
S2 = Support 2 – which is Pivot Point – (Yesterday High – Yesterday Low)
R1 = Resistance 1 – which is (Pivot Point x 2) – Yesterday Low
R2 = Resistance 2 – which is Pivot Point + (Yesterday High – Yesterday Low)
P = Pivot point – which is (Yesterday High + Yesterday Close + Yesterday Low)/3
Pivot Point, R1 and S1 are the most important Pivot Levels, but we can also calculate the R2 and S2. Hence, we will have 5 horizontal lines on our chart: R1, R2, Pivot Point, S1 & S2
The high, low and closing prices for every 24-hour day in the ForEx market is calculated by using the previous days’ pricing, which is done by checking that specific day’s candlestick. This is typically based on the New York closing time on a 24-hour cycle; after which the next candlestick appears.
Therefore, if a trader wants to initiate a trade, (example) on November the 28th, they will need to check the 27th’s candlestick and find the high, low, and closing prices of the 27th. The trader may also plot the points (pivot points) on smaller timeframes such as five minutes, or even an hour. Pivot levels can indicate when the price will change course, or reverse.
The example which follows is a five minute chart, in which the pivot levels are calculated and plotted, where the high, low and closing prices for the 27th of November are involved. The high, low, closing price for the 28th of November are as follows (example, only).
High = 1.4787
Low = 1.4737
Close = 1.4787
Here is the calculated Pivot Points according to the above formulae
R2 = 1.4820
R1 = 1.4804
Pivot Point = 1.4770
S1 = 1.4754
S2 = 1.4720
However, as any other indicator Pivot points do not indicate a 100% accurate answer, as they are only indicators, which give you a general idea of the flow and direction of a market that is being traded; it may not work at all.
As explained previously though, it is a good component to have on a chart even if the trading system is not a pivot point-supporting platform. These are the levels that a price may react to during the day.