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
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
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
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.
by Eddie Sieberhagen