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Pivot points can be used in two ways: to spot the main trend of the currency pair or use them to enter and exit the market. To identify the direction, if the price level of the pivot point is broken in an ascending move, the market is bullish and if it breaks below it is bearish. Generally, if prices hold above the pivot point it can be said that the market will be up-trending and when they can’t cross above they will be down-trending. However, keep in mind that pivots are short term trend indicators, useful throughout the day in which they are calculated and need to be redrawn at the end of the day.

They can offer easy-to-spot entry and exit levels to include in any given trading strategy. For example, a limit order can be set on a support level to be executed if the support is broken and the stop-loss can be placed at one of the resistances.

Another popular though less common used calculation for pivot points is the Fibonacci formula. The main pivot is set through adding the High, Low and Close prices for the period we wish to analyze, and dividing the result by 3. The range is the difference between High and Low, and successive levels are projected by adding a Fibonacci sequence to the pivot, and multiplying the result by the range.

Fibonacci's Pivot Points Formulas

R3 = Pivot + 1.000 * (H - L)

R2 = Pivot + 0.618 * (H - L)

R1 = Pivot + 0.382 * (H - L)

Pivot = ( H + L + C ) / 3

S1 = Pivot - 0.382 * (H - L)

S2 = Pivot - 0.618 * (H - L)

S3 = Pivot - 1.000 * (H - L)

There is also a different version of this formula that uses the 50% value for second levels of resistance and support and uses the Close price in its calculations, instead of Pivot. The range of the previous period is calculated, then multiplied by the three successive Fibonacci levels and the resultant is then added to the Close price for resistances or substracted from the closing value to obtain support levels.

First step

Range Extension 1=Range*1.382
Range Extension 2=Range*1.5
Range Extension 3=Range*1.618

Second step
Fib Resistance 1= Previous Close+Range Extension 1
Fib Resistance 2=
Previous Close+Range Extension 2
Fib Resistance 3= Previous Close+Range Extension 3

Third step

Fib Support 1=Yesterday's Close-Range Extension 1
Fib Support 2=Yesterday's Close-Range Extension 2
Fib Support 3=Yesterday's Close-Range Extension 3

In our next article we will be calculating Camarilla pivot points.

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