There are, of course, many systems that currency traders use to try to predict where the market is going for any of their particular pairs but one that’s been around a long time is the use of pivot points. They were originally used by floor traders as a relatively simple way to judge where the market was going during a trading day and their use was restricted primarily just to that.
It’s basically a system that uses simple arithmetic and the previous day’s high, low and closing positions. The pivot point is the level at which the market direction changes for the day. Using simple formulas you calculate what are called the pivot level and the support and resistance levels. These three are collectively known as the pivot points.

One reason pivot points are still in use and are popular is that they are predictive as opposed to lagging. With pivot points the previous day’s information is used to make predictions about the current trading day. And because so many traders follow pivot points you will often find that the market reacts at these levels, giving you an opportunity to trade.

There are plenty of pivot point calculators that you can find online but if you want to do it yourself you can also since the calculations are simple. Here’s an example of a formula I found online that works quite well:

• 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)

Using the previous day’s high, low and closing information you end with seven different points comprised of three resistance levels, three support levels and the pivot point itself. If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades. The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.

This is a simplified look at pivot points and we’ll go into more detail in other articles but you get the general idea. Since they are so simple to calculate and provide predictive information, pivot points will probably always be popular with traders and you may be able to benefit also from their use.