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Pivot
Point
Trading Forex With Pivot Points
By E.J Sieberhagen
Forex Pivot Point Trading are used today by Forex Traders and
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 are 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 favourite 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 favourite 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.
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Forex pivot point trading is an easy way for traders to utilize
the pivot points and predict what is possible in the market. There
are some easy to use, follow, and remember tips that will help
any Forex market investor use pivot points and the associated
support and resistance levels to minimize their risks.
If the price is at the pivot point, a move back to the resistance
one or support one level is very possible. If the price is at
the resistance one level, you can expect to see a move to the
resistance two level or a move back towards the pivot point. If
the price of the currency is at the support one levels, expect
it to move towards the support two level or to go back towards
the pivot point level. If the price is at resistance two levels
then it can be expected to move towards the resistance three levels
or back towards the resistance one level. If the price is at the
support two level, you can expect it to move towards the support
three level or a move back towards the support one level.
Any news that is a significant influence to the market will have
an effect on prices. If there is no news at all that has a significant
influence on the market, the price will generally move from the
pivot point to either support or resistance level one. If there
is any significant news which has an influence on the market,
then market price may go right through the resistance one or support
one level, and reach level two, or even three, of the support
or resistance levels. Resistance level three and support level
three are used by Forex market traders as a general indication
of the maximum range for days that are extremely violatile but
may occasionally be exceeded. Pivot points work excellently in
sideways markets because prices will usually range between the
resistance level one and the support level one price fluctuation.
In a very strong Forex market trend, the price may blow right
through a pivot line and keep moving.
The pivot point is a very important tool used by Forex market
traders to analyze market fluctuations. The pivot point is the
first place an investor usually enters a trade, because the pivot
point is the primary support and resistance level and the biggest
price movements generally occur at the pivot point price. By following
the tips above, pivot point trading on the Forex market will help
a trader anticipate market trends and minimize the risk.
