Pivot points are short-term, predictive (as opposed to lagging) indicators, which fact explains their popularity: it’s more profitable to learn where the market is heading rather than where it’s been.

Each day’s pivot points are calculated from the previous day’s price action, usually timed from midnight to midnight GMT, or based on the conclusion of the New York trading session at 5:00 PM Eastern. The pivot point is the lynchpin about which the current day’s prices are expected to swing, particularly in a range-bound or trending market. Resistance and support levels are also calculated in this manner, to help forex traders time their entrances to and exits from the market.

Of course, there is inherent risk in any form of trading, and one must be prepared to accept losses; but it has been demonstrated that the consistent use of a strategy tends to make for more successful trading. Daily pivot points applied to a 15-minute chart, balanced with an oscillator such as RSI and possibly a moving average envelope as shown on the illustration below, is one such popular scalping strategy.

There are five major points employed in this forex trading strategy: the pivot point itself, the first and second resistance levels, and the first and second support levels. There are any number of other points that traders can use; however, complicated charts make for complicated trading without necessarily offering real assistance. Beginning traders in particular are cautioned against using too many indicators.

Pivot points are calculated for monthly, weekly, and daily price action. As these are short-term indicators, they must be recalculated everyday, based upon the previous trading period’s high, low, and closing prices.

Many pivot point calculators are available online. All use the same equations, which are:

second resistance (R2) = pivot point + (R1 – S1)
first resistance (R1) = 2 x pivot point – previous day’s low
pivot point = (previous day’s high + low + close) / 3
first support (S1) = 2 x pivot point – previous day’s high
second support (S2) = pivot point – (R1 – S1)

Below is an example of pivot points in action, applied to the CAD/USD 15-minute chart for Friday 23 November 2007:

Note how the day’s forex trading opens near the pivot point at 0.9842and rapidly drops below it. When the first full candle or heiken ashi forms below the pivot point, confirmed by the oscillator or envelope around 0.9835, the strategy is to enter the market short with the stop loss placed ten pips above the pivot point and the take profit set at S1, in this case 0.9800. This trade would earn the scalper 30–35 pips.

Also note that, after reaching the S1 level, several doji signal a price reversal. Again, once the first full heiken ashi forms above the S1 level, the strategy is to re-enter the market long around 0.9815. Normally for this trade the take profit would be planned at the pivot point itself; but in this instance the trading simply blew through the pivot, signaling a strong uptrend that could be ridden all the way to the R1 level at 0.9897, although cautious traders would be forgiven for taking some of their profits during the dithering at the midpoint of 0.9855!