We are going to learn how to calculate those all-important pivot points that we discussed earlier. The last trading day’s open, close, high and low are used to calculate the pivot point and related support and resistance areas.
Certain asset classes like forex have a 24-hour market, but traders still utilize the New York closing time of 4:00pm ET as the prior day’s close.
Let’s now look at how the pivot point is calculated without wasting any time.
Pivot Point (PP) = (Previous High + Previous Low + Previous Close)/3
After obtaining the value of the pivot point from the above formula, we proceed to compute the support and resistance levels. Let’s first show you how to obtain first level support (S1) and resistance (R1).
S1 = (2*PP) – Previous High
R1 = (2*PP) – Previous Low
Now here is how to calculate second level support (S2) and resistance (R2).
S2 = PP – (Previous High – Previous Low)
R2 = PP + (Previous High – Previous Low)
Then if you wish, you can look to estimate the third level of support (S3) and resistance (R3).
S3 = Previous Low – 2(Previous High – PP)
R3 = Previous High + 2(PP – Previous Low)
There are also intermediate points or mid-point levels that some charting software make available for your convenience. In essence, these are mini levels between the most important pivot point and the associated support/resistance levels.
Conclusion: Some good news for binary option traders
Nowadays, a lot of charting software tools will calculate the pivot points, etc for you. Make sure to adjust the settings on these charting tools and include the correct price and closing time.
XForexTrade.com will make life easy for you and suggest some resources where you can calculate pivot points. Pivot Point Calculator is one such resource. MyPivots also has a handy calculator and so does FX Street.
Pivot points have been back tested by us and they have held up quite well in the past. Recall that using pivot points are great because they are objective. Go ahead and check out how price has reacted to them in past sessions.