"What The Heck is a Pivot Point?"You may have come across the pivot point and wondering why so many traders keep an eye on those points. Well, the pivot point is simply a trading strategy that was used mainly by floor traders to predict price movement. They have been around for decades and are important non-lagging indicators as those critical price levels have been calculated well in advance for traders to take advantage of. These points are easy to calculate by using some very simple arithmetic. The main data required is the high, low and close of the previous day’s trading (use 5pm EST as the open and close). Once all the data are obtained, just add them onto a pivot point calculator that you may find in the Forex tools section. This gives you 7 critical points namely the pivot point level, resistance levels (R1, R2, R3) and the support levels (S1, S2, S3). You may use those levels as potential turning point for the day you are about to trade. If you are the type who would rather work out the pivot levels on paper, here are the formulas: (Note: Remember that you are taking the previous days closing data for the day you are about to trade) R3 = High + 2*(Pivot - Low) Or you can let this handy pivot point calculator do all the nitty gritty work for you. Simply download (Save) and extract the file to your desktop. Open the application then enter the high, low and close for the previous day and hit "Calculate". Now let’s see how all those levels may work in your favor. If the market opens above the pivot point, the probability of long trades is higher. On the other hand if the market opens below the pivot point, then bias for the day is short trades only. The levels that you as a trader must have an eye on are the pivot point (PP), the resistance level 1 (R1) and the support level (S1), which are the three most important points. Those levels are critical as they are the points to look, for a possible reversal or a break out. Thus, breakout of level R1, for example, in a strong up-trend will provide you with the necessary data to look for R2 as a profit target. The reverse is true for S1 with profit target S2. Below is a screen shot of the pivot levels and price action at these points:
This data was taken from a 15-mins chart dated 20 October. As you can see the pivot levels are overlaid on the chart as PP, R1, and R2. The price closes at midnight around 1.34059. Price opens below the pivot point the next following day meaning that ideal trade for the day will be short ones only. However as you may see, price first breaks PP level at point marked 1, then retraces back at point 2 bouncing off all the way up to R1 at point 3. R1 is retested at point 4 where price breaks level to move further up to R2 at point 5. Important note to be made is that once a resistance level is broken it acts as support for price movement. R2 from chart above acted as a strong resistance level, thus restricting price to move further up. This restriction in price movement pushed price all the way down breaking each level now turned support. Our theory of taking only short trades for the day did stand with price retracing all the way back to S3. Adding an indicator such as the 50 EMA can help you make an inform decision about entering trades.The main time to look for a trade with that system is at the open of the London market and when both the London and US market overlaps. If bias is short for the day, wait until the 50 EMA line is breached. If conditions are in your favor take the trade with stop loss to the nearest high and profit target to the next support level (or which level best suits you). Screen shot of 50 EMA on chart:
Have a look at this great video showing you how you can use pivot points to score pips: This type of trading can be immensely rewarding if you jump on the right wave at the right time...which ofcourse comes with experience. You’ll just have to kick back and ride the wave until you hit your profit target. However, it may be quite a risky method if you don’t plan your trade. My word of advice is to make sure that the indicators you are using agree to the rules of your trade. Money management is key in this system as the gain factor is very high if you are able to minimize your risks. Risk only 2% of your account on every trade you take, this will keep you in the game until the next session. To your success, Top of: Pivot Point Page Back to: Forex Charts Page Back to: Forex Trading Domain Homepage
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