As a definition, a pivot point is a turning point or condition, that is, a point is a level in which the sentiment of the market changes from "bullish" to "bearish" or vice versa. If the market breaks this level to the upside, then the sentiment is said to be bullish and it is likely to continue its way up. Conversely, if the market breaks this level down, then the sentiment is bearish, and it is expected to continue its way down. At pivot points, the exchange rate is expected to show some kind of support or resistance in the form of bounces and reversals.

The great advantage of a technique based on pivot points is the fact that this tool is based on price action (high, low and close of the day) and doesn't lag price as most technical indicators do. For some strategies, the signal of any lagging indicator could come too late, when the motion to capture is already accomplished. As a disadvantage, one could see this tool's inability to adapt to price changes throughout the day since its the previous day's data which establishes the pivot point for the next day.

Pivot Points can be applied to any time frame, but they are mainly used to identify the intraday directional bias as well as significant support and resistance levels. For that reason they are best visualized on intraday time frames. Although pivots are calculated based on the previous day, they may be calculated on weekly or monthly data.

Here, "S" represents the support levels, "R" the resistance levels and "P" the pivot point. High, low and close are represented by the "H", "L" and "C" respectively.

Since the Forex is a 24hr market there is an eternal debate on deciding at which time the open, the close, the high and the low from each 24-hour cycle should be taken. Nevertheless, the majority of traders agree that the most accurate predictions are achieved when the pivot point is adjusted to the GMT time. That is made by taking the open at 00:00 GMT and the close at 23:59 GMT, or by taking the open at 00:00 EST and the close at 23:59 EST.

Info Box - MIG's platform is located on a server with CET (Central European Time), which is just one or two hours ahead of GMT (depending on the time of the year).  This makes the platform ideal to plot pivot points on intraday charts. Test it out and see the difference! [link download demo]

Facts Box - There is a reason why pivot points work so well in today's electronic markets, even if they were originally created in a time when such devices didn't existed: the numbers worked so well when they first came out in the first half of the 20th century. What happened then is that everybody started using them thinking that they were going to "predict" the high or low of the day and that improper use make it lose some of their strength. This just caused more opportunities for the floor traders to fade these levels where the public would buy or sell blindly on these numbers. Today, with literally hundreds of indicators to look at, the idea of too many people using one tool is not as likely. For this reason some of the more traditional studies are starting to work well again.