There are many ways to calculate pivot point. The most accurate way that found is calculated by taking the average of the high, low and close of a previous period (or session).
Pivot point (PP) = (High + Low + Close) / 3
Below will be the example:
Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458
The PP would be,
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439
What is the message behind the number? It tells us about the market that trade above 1.2439, it is bull market. And if the market is trading below this 1.2439, it is likely to be a bear market. This kind of condition will continue until the beginning of next session.
Since Forex is a 24 hours market, we can take the open, close, high and low from each session at anytime. But the more accurate predictions is calculating at 00:00 GMT until the close at 23:59 GMT. There are also have support and resistance levels in this market.
There is other calculation of the PP as below:
Support 1 (S1) = (PP * 2) – H
Resistance 1 (R1) = (PP * 2) - L
Support 2 (S2) = PP – (R1 – S1)
Resistance 2 (R2) = PP + (R1 – S1)
H =High of the previous period
L =low of the previous period
Let’s say, PP = 1.2439
S1 = (1.2439 * 2) - 1.2474 = 1.2404
R1 = (1.2439 * 2) – 1.2376 = 1.2502
R2 = 1.2439 + (1.2636 – 1.2537) = 1.2537
S2 = 1.2439 – (1.2636 – 1.2537) = 1.2537
These levels are used to mark down the levels of support and resistance for the present session.
By using the same example above, the PP was calculated by using the information of the earlier session (the day before). From that, we can see clearly about the resistance and support levels. However, we also can use the previous weekly or monthly information in order to calculate the support and resistance levels. By doing so, we are able to notice the market flowing over a longer term. In addition, we are able to see the possible levels that the support and resistance levels might have achieved throughout the week or month. Most of the long term dealers calculated the pivot point by using the weekly or monthly data, and sometimes it also used by short term dealers in order to get a good idea about the longer term trend of the current market.
