Understanding forex pivot points is probably the key to understanding forex trading. Forex pivot point is a technical aspect of forex trading. In fact, it is one among several technical aspects of forex trading that you will find very useful.
If you look at the forex markets carefully, you will notice that it often changes direction. Consequently it is these changes in direction that lead to the generation of either profits or losses. The level at which forex markets changes direction for the day is referred to as the pivot point. Recognizing the reversal of trend will help you to capitalize on it. For example, assume the Euro started the day at $1.23 against the dollar and rose to a high of $ 1.55 before falling back to $ 1.20. You would note that the market changed direction for the day at $ 1.55, and so this would be a pivot point in this purely hypothetical example. We are not as yet talking of pivot points relating to support and resistance levels as that would obfuscate the issue.
Firstly you have to reckon with the previous day’s open, high, low, and close data. Next, you have to get down to calculating the pivot points. For example, suppose on the 7th June 08 the Euro/Dollar (EUR/USD) had the following:
High – 1.5770
Low – 1.5715
Close – 1.5736
Using this data the pivot points for the subsequent day’s trading can be calculated using the formula,
Pivot Point = (High + Close + Low)/3 = 1.5740
Now we have calculated the pivot point. Next we could be using the following set of formulae to calculate resistance and support levels.
Resistance 1 = 2 * Pivot – Low
Resistance 2 = Pivot + (R1 – S1)
Resistance 3 = High + 2*(Pivot – Low)
Support 1 = 2 * Pivot – High
Support 2 = Pivot – (R1 – S1)
Support 3 = Low – 2*(High – Pivot)
The levels thus calculated are collectively known as pivot levels. Since we are not learning mathematics here, it is best that you use the formula cited above and calculate yourself the support and resistance levels. In actual practice, when you do forex trading, you could get readymade answers for the pivot levels for a particular days trading, by referring to various websites. One such place where you could get all the pivot levels tailor-made for you is mataf.net. It’s a multi-lingual site, so you could choose your language whether it is English, French, Spanish or Portuguese.
So, all you need is the previous days high, low and close to calculate the relevant pivot points, which works out to 3 resistance levels, 3 support levels and the actual pivot point itself.
Always remember that Resistance1, Support1 and the pivot point itself are the three most important pivot points. Forex trading strategy based on the use of pivot points has been in vogue for a long time. Do you know the reason why it is considered a successful trading strategy? The reason is fairly simple. As a matter of fact, so many traders follow pivot points throughout the world and consequently this phenomenon results in the market itself reacting profusely at the pivot levels. That is how pivot points contribute to a successful trading strategy.
This is indeed an interesting question. Pivot points are an excellent technical analysis tool primarily because of its simplicity, and as such could be used for the following purposes.
It could be used to determine the entry and exit points for the day’s forex trading
As explained to you, the previous days trading activity determines the subsequent day’s likely pivot point. Now as you get on to the forex market and trade yourself, you will see that majority of the currency pairs fluctuate between the levels indicated by the pivot points.
By and large, as you get familiar with forex trading you will learn to use the pivot points in tandem with other technical analysis tools like MACD crossover, candlestick patterns, and moving average crossovers. Each of these technical analysis tools has a specific importance, but more on that later. What you have to remember is that, you have to be careful in using the pivot points. It is always advisable to use the pivot points only after determining the direction of the currency trend for the currency pair you are interested in. Remember, pivot point works best in a trending market. If the market opens above the pivot point then the flavor of the day is long trades, and if it opens below the pivot point then the flavor of the day is short trade.
Pivot points are used to determine important support and resistance levels
Earlier we learnt the basis of calculating the pivot points associated with support and resistance levels. So once you calculate the support and resistance levels, always keep in mind that these are the points at which the direction of the price movement could possibly change. In other words, these are the points at which you got to be careful, as the price movement could possibly change direction. Therefore, pivot points help in furthering the cause of technical analysis in forex trading by determining the support and resistance levels.
Pivot points are useful by all kinds of forex traders, starting from the novice to the most experienced. If you were a short-term trader, you would want to take advantage of small price variations and book a profit. If you were a range bound trader, you would still look to the pivot points to determine the range for trading, as identifying the reversal points will help minimize the risks. If you were a breakout trader, you would use the pivot points to determine the levels to be broken. So almost everyone trading the forex makes a definitive use of the pivot points, as you can predict specific areas of price movement in the market. It is important to remember at all times, that the biggest price movements generally occur at the pivot point price. Consequently, it is at this place a forex trader would look to first enter a trade. Therefore, in a way, pivot points will help you anticipate market trend at all times.
A pivot point is mathematically ordained and hence an objective tool, which means there could be only one set of pivot points, for a particular period of time. On the contrary, other technical indicators are all subjective whether it is Fibonacci or Elliot waves. As a result, using these other indicators you could well have different people trading in different directions at almost the same identical point in time. But that is unlikely to happen with a pivot point based trading strategy, because what you are doing here is essentially minimizing the losses by predicting the currency fluctuation points and acting on them.