Pivot Point Analysis is a robust and time tested method of market analysis. This strategy works in all markets that have an established range. The range is the high and low of a given time period and it accurately depicts the market participants exuberant bullishness and pessimistic bearishness for a given trading session.

The high and low are the two most important reference points for a given trading session. The high is a reference point for those who bought out of greed thinking that they were missing an opportunity. Similarly, the low depicts selling out of fear thinking that they would lose by staying in the long trade.

Pivot Points Analysis depends on a number of mathematical formulas that are not very complex but that use these three important reference points the High (H), Low (L) and the Close (C).

Since there is no formal open and close in the forex market, we can take the NY Bank Settlement at 5:00 PM EST as the close of the daily trading session and 5:05 PM EST as the next day’s trading session open. It is rare to find the daily trading session go beyond the R2 and S2 levels.

R3 is the extreme resistance level that is usually caused by the news driven price shock and most of the time does not come into play. R2 is the level where the price action mostly experiences significant resistance. However, in case of a bearish market, price action will most often fail to break the resistance level R1.

P is the focal price level. As a rule, if the market opens above the Pivot Point P, the sentiment is considered to be bullish and if the market opens below the Pivot Point P, the market sentiment is considered to be bearish. S1 is the price level where price action tends to reverse under bullish market conditions but most times falls short. The market often sees significant support at or near the S2 level under bearish market conditions. S3 level represents price decline mostly caused by news driven price shocks.

Now, you might be feeling analysis paralysis due to information overload caused by too many levels used in pivot point analysis. Here is how you are going to filter these numbers. Pivot Point can be used as the actual trading number in determining the high or low of a given time period. Read the next article on how to filter these numbers.

Mr. Ahmad Hassam has done Masters from Harvard University. Try these Forex Signals by two top gun traders in a friendly competition. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade.