Don’t be fooled into thinking it is easy to make money trading the financial markets. There are many elements you need to address, and have a sound working knowledge of, to become a successful trader over the long term. One of these elements is using effective indicators that work in any time frame. One of the most effective indicators that works in any time frame is pivot points.
In this article, I will discuss what pivot points are, how they are calculated, how to trade using pivot points in your Forex trading signals, what various pivot point trading systems are more commonly used, and where to find time saving pivot point resources on the Internet.
Where did pivot point trading develop and what exactly are pivot points?
No one can pinpoint or identify who developed or first started using pivot points to trade the markets. However, we know that pivot points have been around for a long time and were first used by floor traders to estimate intraday turning points in the market. Pivot point trading has proven to work very effectively in most all financial markets, especially in conjunction with candlestick patterns.
So what exactly is a pivot point. The web definition of a pivot point is “a price level of significance in technical analysis of a financial market that is used by traders as a predictive indicator of market movement.” In other words, it is a certain support or resistance level that represents a point at which a major price movement is expected to occur. This information can be a great advantage to the trader as to when to get into or out of a trade.
How pivot points are calculated.
There are a number of different methods for calculating pivot points. The most popular of these systems is the five-point system which uses the previous day’s high, low, and close; coupled with two support levels and two resistance levels to calculated the pivot point.
The equations are as follows:
R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C) / 3
S1 = (P x 2) – H
S2 = P – (H – L) =P – (R1 – S1)
The symbols represent the following: S-represents support levels, R-represents resistance levels, and P-represents the pivot point. High, low and close are represented by H, L, and C respectively. When calculating pivot points it is important to remember that the pivot point is the primary support and resistance line in and of itself.
How to trade using pivot points.
One of the reasons that pivot points are so effective in determining when to make a trade is that they are predictive of future market direction in real time as opposed to lagging; showing what has happened in the recent past as is the case with most indicators. Another reason that pivot points work well to predict the directional movement of the market is that so many traders follow pivot points which in turn causes the market to react in one direction or another at these predetermined levels thus providing an opportunity to make a trade. Before we make a trade at PipVac and issue our Forex trading signals, we always compute and take into consideration the pivot points on a given currency pair.
When using pivot points to trade the market, the three most important pivot points are R1, S1, and the actual pivot point itself. The general idea is to look for a break or reversal of S1 or R1 because by the time the price reaches R2/R3 or S2/S3, the market will already be overbought or oversold for that time frame. When these subsequent price levels are reached, the trader should be looking to exit the trade.
Next I will discuss more specifically how to use pivot point strategies to trade the market.
The Breakout Trade
If at the beginning of the trading day, price is below the pivot point, we should be looking for short trades. There should also be a horizontal range channel that has formed. We should be looking at a breakout of the range channel preferably to the downside. With this type of trade, we would have our sell order entered just below the lower channel line with a stop order just above the upper channel line. Our take profit would be set at the S1 level.
The Pullback Trade
In the pullback trade, the market passes through S1 and then pulls back. We would then place an entry order just below support and our stop just above the most recent high. Our take profit would then be set at the S2 level. If our take profit level is not taken and price starts drifting upwards to S1, then the market sentiment might be changing and we should exit our trade.
Breakout of Resistance
If the market has started drifting back towards S1 and has formed a horizontal channel (congestion area), this scenario provides another opportunity for a trade. We would then place an entry order just above the upper channel line and our take profit target would then be the original pivot point line. If we were trading more than one position at this point, we would then take profit on half our positions, set a tight stop loss, and then let the trade develop and we would take the remainder of our profit at R1.
Advanced
As you may be starting to see, there are many ways to trade with pivot points. One of the methods I use on my personal account is to use the cross of two moving averages as a confirmation of a breakout. We can even use combination’s of indicators to help us make a decision. For example, I use the CCI and Laguerre indicators to make a decision on all of my trades. The best way to use pivot points with your favorite indicators is to experiment and see which ones work best for you.
Pivot Point Resources
If you are thinking at this point that it is a pain to calculate pivot points each day for the various markets you are trading, you are right. Luckily for us however, there are a number of resources we can use to automatically calculate of pivot points for us and I will list some of the ones I use. If you recall, I mentioned earlier that there are a number of different formulas for figuring pivot points. So you will need to experiment with some of these and determine which ones work best for you and the market you are trading.
You can use the following pivot point calculators free of charge at the following websites to help develop your Forex trading systems:
- http://www.pivotpointcalculator.com (this is my preferred calculator and I use the “Woodie” option)
- http://www.livecharts.co.uk/pivotpoint.php (includes Fibonacci pivots)
- http://www.mataf.net/en/tools/03-01-pivot-point (price point are already calculated for all currency pairs)
In conclusion, using pivot points as one of your tools to trade the market would be a very wise decision on your part. You are putting one more weapon in your arsenal to assist you in becoming a more successful trader. However, it is important to remember that the price break of a level is the signals to trade and that the indicators are just a confirmation.
I hope these Forex trading tips are of some profit to someone. If you have any questions about this article, please comment below and I will get back to you as soon as possible.
