Easy Forex Trading: Using Pivot Points
When you learn forex trading there are many technical tools to master
, but one of the simplest to use is the pivot point. Pivot points work with support and resistance levels to give you an indication of entry and exit points.
The first thing to do when you plan to use pivot points is to identify whether the pair is currently in an upward or downward trend. This would mean looking at patterns over several days or even weeks. Of course, if you regularly trade the pair, you probably already know which direction the trend is currently headed so it'll be easier in that case.
Trends are your best friend in forex exchange. If you correctly identify a strong trend and get in on the early stages, you could make big, big money.
Once you know the trend, you will generally trade in that direction, since you're friends now :)
So as long as the pivots indicate a long order during an upward trend or a short order during a downward trend, you can trade. But if they indicate the opposite, it's best to just leave it. There is too much risk of the trade going wrong in that situation.
Pivot points are calculated from the last day's trading high, low and close. Most traders use the New York session closing time, but that is up to you. Just be consistent. So the pivot point is yesterday's high plus low plus close, divided by 3. A very simple calculation, but it will be done for you in your chart software.
Then the support and resistance lines are calculated in relation to that pivot point. In a choppy market the support and resistance lines will be parallel and you can expect the market to turn when it approaches them. You will see two of each on your chart. The first support line is twice the pivot point minus yesterday's high. The second support level is the pivot point minus the high minus the low. Resistance lines are the equivalent in the other direction. Again, these calculations will be done for you.
You would then use that pivot point and levels for the whole of the current day's trading, and recalculate tomorrow on the basis of today's high, low and close.
Pivot points and their associated support and resistance lines are used in two main ways by forex traders. If you are trading within the range, you would enter a buy order at or near to the support level, and a sell order at or near to resistance. The levels can also be used with other indicators to identify a breakout.
Of course, as with any system, you should check your signal against at least one other indicator before trading. The MACD crossover or stochastic overbought/oversold levels can be of great value here. If it shows that the price is in the overbought or oversold range, you have another signal for the trade. It's also a good idea to check several different time frames to ensure that the direction of the trend is clear.
The basis of pivot point trading is the assumption that prices will tend to fluctuate between the support and resistance levels, bearing in mind the effect of the current trend. The simplicity of this method can be very attractive when you are setting out to learn forex, and it can also be very effective.
Whatever you do, don't try to cover all of the bases in forex trading. A simple system is best when you're starting out in forex trading. Just try to be consistent in following your trading system...
...to your trading success!
Easy Forex Trading: Using Pivot Points
By: Denis Marsili
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