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Where do Forex pivot points come from?


Pivot points come from the data on trading activity from the previous time period (for example, the previous day) and their role is let you identify entry and exit points for the current trading period.


How do you identify them?


First of all, calculate the pivot point for a currency pair by summing the high, the low and the closing price of this pair from the previous trading session, and dividing the total by 3. You calculation would look like this:


Pivot point (PP) = (High + Low + Close) / 3


Next, calculate the support and resistance levels associated with this pivot point as follows:


First support level (S1) = (twice the value of the Pivot Point) – High from last session

First resistance level (R1) = (twice the value of the Pivot Point) – Low from last session


You can also calculate second levels of support and resistance as follows:


Second support (S2) = PP – (High – Low)

Second resistance (R2) = PP + (High - Low)


How do you use them?


Pivot points are something of a self-fulfilling prophecy. Enough traders use them that the market in general shows a reaction at the level of the pivot point itself (PP), and the support and resistance levels of S1 and R1 above. These levels allow you to see if price breakout is occurring and therefore the kinds of trades that you might want to make. If the market for a currency pair opens above the pivot point, then buying activity is likely for the rest of the trading session. If the market opens below the pivot point, then selling activity is likely.