Pivot Points In Trading Forex - What They Are And How To Use Them
You may hear that 1 of the useful tools in a forex trader's toolbox is a pivot point calculator. Pivot points are one of the commonly used triggers for trading systems. If you're new to the forex market, though, you may be foggy on exactly what pivot points are and what they can mean to your trading.
In a nutshell, pivot points are actually what they sound like - the point at which the forex market is expected to turn - if it is been going down, a pivot point is the value at which it will reverse the trend and begin to climb. If it's been rising, then the pivot point is where the sentiment of the traders will turn and begin a downward trend. Obviously, being able to predict major movements in the money market is a valuable skill, since it hints at the where the market is moving and whether or not this is the time to trade or stick.
Pivot point trading is an especially popular method of mapping out a trading strategy. It was originally utilized by floor traders in the stock market who wanted it because it enabled them to gauge where the market was heading with just a few simple bits of information and calculations. By knowing the high, low, opening and closing points from the previous day, they could calculate a point at which the market had 'turned' to head upward or downward. Pivot points can help predict where the market is going - and coupled with the resistance and support points, give you an idea how far in that direction it will go.
There are a number of methods to calculate the pivot points for the day, but the most usual and easiest is to get the average of the opening, closing and high points for the last day's trading. There are other pivot points that can be calculated from those numbers as well. Prior to moving on and talk about how to calculate them and what they mean, let's define a few terms:
Pivot point - the point where the forex market reverses a current flow
Resistance - A high point in a market chart that recurs frequently. Generally, it's the point where the market (or currency) will begin a downturn
Support - A low point in the market chart that recurs regularly. Generally, it is the point where the forex market (or currency) will begin to head back up.
Typically, support and resistance paces are hard to break through. Most of the time as the numbers approach that level; there will be a little rebound in the other way. An interesting event is that once a resistance or support point is broken, it tries to switch sides. A broken resistance will commonly turn into a support for prices on the other side of the box.
The most common calculation for arriving at a pivot point is:
Pivot: (High + Close + Low) divide by 3
Resistance: 2 * Pivot - Low
Support : 2 * Pivot - High
USD/EUR Date:02/03/06 14:40 O=0.83174 H=0.83188 L=0.83167 C=0.83188
Given this data for Feb 3, 2006, the pivot points for Feb 4, 2006 would look like this:
Pivot: 0.83180
Resistance: 0.83193
Support: 0.83172
Those digits provide me some points on which to base my strategy for the day. If the market opens above the pivot level, it is a bull market, and most experts would go for longer trades, since the direction of the forex market is going up. If it opens below the pivot point, it is time to favor short trades and quick sales.
There are 2 common sales methods that are based on pivot, resistance and support points.
Breakout Trade: When a currency pair breaks through a resistance or support point, there's usually a surge of happenings all over it. Buy if the charts show a break through a resistance, sell if the rate drops below a support point.
Pullback Trade: When the exchange rate heads back from a high, most forex traders will purchase, based on other info that is there and available. It's a tricky move, though, since the pullback could just be a temporary pause in the upward momentum, or the beginning of a downward rebound.
Using pivot points to make your strategy in day trading is a complex matter. You will see a great deal written about it by different gurus and experts. These basics can help you understand what you're reading from them.
Article Source: FxTradingStock.com
About the Author
Looking to find the best deal on Forex Trading Success , then visit www.tradingsuccessroadmap.com/forex/ to find the best advice on how to trade forex successfully for you.
by: Devon Reyes
Total views: 28
Word Count: 773
Date: Sat, 30 Oct 2010
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