The first thing you're going to learn is how to calculate pivot point levels.
The pivot point and associated support and resistance levels are calculated by using the last trading session's open, high, low, and close. Since forex is a 24-hour market, most traders use the New York closing time of 4:00pm EST as the previous day's close.
The calculation for a pivot point is shown below:
Pivot point (PP) = (High + Low + Close) / 3
Support and resistance levels are then calculated off the pivot point like so:
First level support and resistance:
First resistance (R1) = (2 x PP) - Low
First support (S1) = (2 x PP) - High
Second level of support and resistance:
Second resistance (R2) = PP + (High - Low)
Second support (S2) = PP - (High - Low)
Third level of support and resistance:
Third resistance (R3) = High + 2(PP - Low)
Third support (S3) = Low - 2(High - PP)
Keep in mind that some charting software plot intermediate levels or mid-point levels. These are basically mini levels between the main pivot point and support and resistance levels.
If you hated algebra, have no fear because you don't have to perform these calculations yourself. Most charting softwares will automatically do this for you. Just make sure you configure your settings so that it uses the correct closing time and price.
We here at BabyPips.com also have our very own Pivot Point Calculator!
The awesome part is, just like everything on the website, it's FREE!
The calculator can come in handy, especially if you want to do a little back testing to see how pivot point levels have held up in the past. Remember, one of the advantages of using pivot points is that it is objective, so it's very easy to test how price reacted to them.
Next up, we'll teach you the various ways in which you can incorporate pivot points into your trading strategy.
(See more) Range Trading with Pivot Points
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