What are Pivot Points in Forex Trading
Forex Pivot Points are calculated on the previous days move and trades are entered when the market hits a support or resistance line of the pivot point providing your OB/OS indicator is in agreement.
All the support and resist lines are put in place 1st thing in the morning. Then you wait for the market to hit those entry Points.
Contrary to what some might believe, trading Forex with Pivot Points is probably the most popular method used in trading the financial markets today. Long before the invention of computers this was the method used by the traders in the pits to determine hidden support and resistance levels.
The Pivot Point is still used by experienced floor traders and technical analysts alike. The major advantage now is that we now have computers and can calculate our points well in advance. Many charting packages can calculate them for you automatically, thus enhancing the use of Pivot Points.
Whilst there is a lot more to Pivot Point Trading in Forex Trading than we will be mentioned in this article, the purpose of this exercise is to introduce you to the concept of trading Forex with Pivot Points.
Remember the market can only go up, down, or sideways. It is like an elastic band that has been stretched, sooner or later it will rebound to an equilibrium point where the market is in balance, and then stretch the opposite way only to rebound and reach another balance point. Then some fundamental announcement or happening will drive the market in a new direction and so on day after day. Pivot Points can aid us in determining how far that elastic can stretch before it rebounds.
Whilst there are many time frames that can be used for calculating Pivots, for the purpose of this exercise lets concentrate on the daily time frame (i.e.: 24hr) Pivot Points are calculated using the previous days, Open, High, Low, and Close figures. There are many Pivot Point calculators available on the web so you don’t have to waste your time doing the calculations manually. Also bear in mind the longer the time frame you are using the longer you must be prepared to stay in the market or wait for the next entry point.
Pivot points unlike many other indicators are an objective tool. Because they are mathematically calculated, there can only be one answer for a specific time period.
Many subjective indicators like Fibonacci retracements, (and I am a great fib fan) Elliot waves etc. can have different people trading in different directions at the same time due to individual interpretation.
The PP’s can help you to predict the next day’s highs and lows in advance. PP’s can give you anything from 4 to 8 support and resistance levels. However you still have to be able to identify the trend to be a successful PP trader. Pivot Points also work best in a trending market.
Entry and Exit Points
Pivot Points can give you exact entry and exit points, rather than enter markets that are in the middle of a run, or about to turn the other way. Here is where we use other indicators to assist on the entry or exit. If the market stalls at a Pivot Point level, and you have an overbought or oversold indicator that will be a good time to get in or out. Or if a Fibonacci level coincides with a Pivot Point level it can make a strong case to enter or exit a trade. If the market is bullish and your favorite indicator is not near overbought, when it hits the first resistance level then you probably have a good case to stay in the market and make your profit target the next Pivot Point resistance line. The breakout above the 1st resistance level can then become your new stop or stop reverse.
Obviously the reverse is true of the support level as well. By combining the Pivot Points with your favorite indicator you can develop your own trading system that no one else uses.
Trading for the day will probably remain between the 1st support (S1) and resistance (R1) levels as the floor traders make their markets. Once one of these levels is penetrated other traders will be attracted to the market, and should the second level be breached, the longer term traders are attracted to the market.
Knowledge of where the floor traders are expecting support or resistance can be a distinct advantage especially when there is no outside influence in the market. Provided no significant market news has occurred between yesterdays close and today’s opening, the local floor traders and market makers tend to move the market between the Pivot Point (P) and the first support line (S1) and resistance (R1) If one of these levels is breached then expect the market to test the next levels (S2) and ( S3) or (R2) and (R3)
Whilst there are many other aspects to Pivot Point trading why not try this simple method first and see if you can develop your own strategy by using your existing trading technique’s in conjunction with the Pivot Points.