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Pivot Points are a mathematical formula which is used to determine the upcoming period’s range depending on the previous period’s high, low and close. Now, the range which is the high and low of a unpredictable moment period correctly depicts the exuberant bullishness and the pessimistic bearishness of that trading session.
High and low to get a trading period are two essential numbers as they represent human psychological habits. High symbolizes those who bought away from pure greed and then on regretted once the market responded and declined from that level. Similarly, low represents those that sold out of fear. They down the road regretted when the market went high. So, High (H) and Low (L) for a given trading period are two essential reference points.
Now, we calculate the Pivot Point Indicator with the following formula which uses the High (H), Low (L) and the Close (C)
Pivot Point (P)= (H+L+C)/3
Resistance (R2)= P+H-L
Resistance (R1)=2P-L
Support (S1)=2P-H
Support (S2)=P-H+L
Anyone can add a third level to these pivot calculations to help target extreme price swings that may happen because of the breaking news event. Currency forex market is very dependent on domestic as well as international news events so a third level of support and resistance may be included;
Resistance (R3)=H+2(P-L)
Support (S3)=L-2(H-P)
Some traders also calculate the Pivot Point with all the High(H), Low (L), Open (O), Close(C);
Pivot Point=(H+L+O+C)/4
Bare this mind that Pivot Points are not a Holy Grail. These numbers are a guide to suit your needs. Now, in one day, the marketplace will hardly ever trade beyond R2 and S2. What these three support and resistance levels will do for you personally is to filter out excess information for you so that you will obtain a clear picture of the market. This is the beauty of pivot points which they remove mass confusion within you and enable you to avoid analysis paralysis. Now let’s discuss the value of these types of three support and resistance levels or if you don’t want you can check Forex Trading Blog that can simply do the maths!
R3 and S3 means extreme bullishness or bearishness on the market usually pushed by news driven price shocks. R3 and S# is a great chance for a short reversal scalp trade for any day trader. R2 and S2 means bullish or bearish conditions on the market with all the time for it to take profit for a positions or possibly a short position. Similarly, R1 and S1 means mild bullish and bearish inside a low volume light volatility consolidating market conditions. Price should come near to this level but most of times will not be able to break it.