Forex pivot points are points at or around which foreign exchange, or forex, prices are expected to pivot, or change direction, as well as possibly gain momentum. These points are used as leading indicators of price movements, meaning that they are considered to be somewhat predictive of the future course of price movements, either up or down. For example, prices trading above a pivot point in a particular period indicate bullishness, the expectation being that prices will move higher in subsequent periods. Prices trading below the pivot point in a particular period indicate bearishness and the expectation that prices will move downward in subsequent periods.
The use of forex pivot points originated among those who practice technical analysis. The main premise of this analysis is that all available information is incorporated in the market price of a widely traded, liquid asset. Technical analysis is popular among bank and other authorized forex dealers, who primarily trade, or exchange, currency pairs, such as the US Dollar and the Japanese yen, in the interbank market. Forex pivot points are calculated by averaging the high, low and closing prices over a particular trading period. In the case of the forex market, this is generally one day, although the use of shorter, intraday, as well as longer term periods is not uncommon.
Three levels of support and resistance typically are calculated in addition to forex pivot points to further support decision making. The primary support levels are considered floors below which prices are not expected to move. Prices breaking and continuing to move lower are considered to mark a change in trend or a move to a lower trading range and require recalculation of pivot points, support and resistance levels. Conversely, prices moving above resistance levels are taken to indicate a change in trend or a move upward to a higher trading range.
A primary support level is calculated by subtracting the low of the previous trading period from the pivot point and subtracting this difference from the pivot point. Conversely, a primary resistance level is obtained by subtracting the pivot point price from the prior period´s high price and adding this to the pivot point. Secondary support and resistance levels are wider. Secondary resistance is calculated by adding the difference between the high and low prices to the pivot point. Secondary support is calculated by subtracting this difference from the pivot point.
Finally, a third, and yet wider, set of support and resistance levels are calculated. Tertiary resistance is calculated by adding twice the difference between the previous high and low to the pivot point. Tertiary support is calculated by subtracting twice the difference from forex pivot points.