For those of you who are new to forex trading pivot points are actually used as a trading strategy, in fact they have actually been around for a long time and were originally used by floor traders. Back then pivot points were a relatively simple way for floor traders to have some kind of idea where the market was heading during the course of the day with only a few calculations. In the forex market pivot points are very popular because they are a very useful tool for range bound traders because they identify points of entry. But other forex traders also find pivot points useful for different reasons. A great example is trend traders and breakout traders. These types of traders use pivot points to spot the key levels that need to be broken for a move to qualify as a breakout.

Pivot points are basically the level at which the market direction changes for the day or the point of rotation. How the pivot points are figured is by using some simple math that involves the previous day's high, low and close. From these numbers you are going to arrive at a series of points, which are called the pivot points. Here are some basic things that you need to know in regards to pivot points:
Various types of pivot points

• Hourly pivot points
• Daily pivot points
• 4 hour pivot points
• Weekly pivot points
• Monthly pivot points
• Pivot levels and charts are updated throughout the day so that they can cater to data adjustments (how the market is changing) during the day
• Long term pivot points provide an idea of where key support and resistance levels should be
• Daily pivot points are useful for swing trading while 4 hour pivot points are useful for intraday trading

• 4 hour pivots are calculated from previous 4 hour bars. These bars end at 2100, 0100, 0500, 0900, 1300, 1700 GMT.
• Can be critical support and resistance levels
• Pivot level, support and resistance levels calculated from that are collectively known as pivot levels
• Pivot points are very popular because they are predictive as opposed to lagging
• In the forex market which is open 24 hours you generally use 5pm EST as the open and close to gather then information that you need, which is an open, high, low and a close for the day. In fact this information actually contains all of the information that you need to use pivot points.
• You use the information to calculate potential turning points for the day you are about to trade
• The market reacts at these levels because so many traders follow pivot points. And the best part is that this gives you an opportunity to trade.

When it comes to calculating pivot points you can either calculate them yourself or you can find a calculator that is available for you to use online. Many different websites and forex brokers offer you a calculator to use to figure pivot points at no charge. But if you want to calculate the pivot points yourself you are going to need to find a formula that works for you. Here is one formula that you can use to calculate pivot points:
Resistance 3 = High + 2*(pivot - low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = (High + Close + Low)/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)

From this formula you can see that just by having the important information from the previous day, which is the high, low and close, you are going to end up with 7 points, which are 3 resistance levels, 3 support levels and the actual pivot point. Once you have calculated these points you can begin using the pivot points to trade. Here are some things that you need to know to begin forex trading with pivot points:

• If the market opens above the pivot point then you are going to want to focus on long trades for that day.
• If the market opens below the pivot point then you are going to want to focus on short trades for that day.
• The three most important pivot points are R1, S1, and the actual pivot point
• Basically when trading pivot points the general idea is to look for a reversal or break of R1 or S1.
• By the time that they market reaches R2, R3 or S2, S3 then the market is going to already be overbought or oversold. So you should actually use those levels for exits rather than entries.

Here is an example of a perfect set:

• The market opens above the pivot level and then stalls slightly at R1 and then goes on to R2.

You would need to enter on a break of R1 with a target of R2. If the market was really strong you would want to close half at R2 and then target R3 with the remainder of your position.

But the sad thing is that we do not live in a perfect world, and forex trading is going to vary day by day, including the conditions of each market. Some days the conditions can be good and on other days the conditions can be horrible. And because of how much the market can vary on any given day you can only take it one day at a time and make the best choices that you can for that one day and then deal with it the best that we can. In order to make the best choices what you need to do is to learn about the various ways that you can trade using pivot points and how some methods are better for certain situations then others.

Here are some of the ways to trade using pivot points, including why some are good or bad in certain situations.

• Breakout trade - When you first start trading, in the beginning of the day in most cases, you are actually below the pivot point, so your bias should be for short trades. What usually happens is that a channel is formed so what you are looking for is for a way to break out of the channel, preferably to the downside. But in this type of trade you will have to sell your entry order just below the lower channel line and have a stop order just above the upper channel line. You will also need to have a target of S1. But keep in mind that this is not going to always be a suitable trade, but it is still considered to be a good entry technique for forex trading.
• Pullback trade - in this type of trade what usually happens is that the market passes through S1 and then pulls back and many forex traders love this kind of set up. But how to execute this type of trade is going to require an entry order that is placed below support, which in most cases is the most recent low before the pullback. And then you are going to need to place a stop above the pullback, which is also the most recent high or the peak. You will also need to place a target set for S2. But what you want to watch out for is that some days the target of S2 is too close and the market might not take out the previous support. If this happens you should know that it means that the market sentiment is beginning to change.
• Breakout of resistance - how this type of trade works is that an entry order is placed just above the upper channel line and a stop is placed just below the lower channel line. And the first target would be the pivot line. Now if you were trading more than one position then you would need to close out half your position as the market approaches the pivot line. You will also need to tighten your stop and then continue to watch the market action at that level. But keep in mind that sometimes the market won't ever stop and when that happens your second target can then become R1 and at that point what you want to so is close out the rest of the position at that level.
• Advanced - an even more advanced method to trade with pivot points is to use the cross of two moving averages as a confirmation of a breakout. You can also use combinations of indicators to help you make a decision. You can mess around with your favorite indicators until you figure something out, but what you want to keep in mind is that the signal is a break of a level and the indicators are just confirmation.