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What
Are Pivot Points in Forex Trading?
You may hear that one of the handier 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 exactly what they sound like – the point at
which the market is expected to turn – if it’s
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 used by floor traders
in the stock market who liked it because it allowed 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 ways to calculate the pivot points for
the day, but the most common – and easiest – is to average
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. Before we talk about how to calculate them
and what they mean, let’s define a few terms:
Pivot
point – the point where the market reverses a current
trend
Resistance – A high point in a market chart that recurs regularly.
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’s the point where the market (or currency) will
begin to climb back up.
Traditionally, support and resistance points are difficult
to break through. Most of the time as the numbers approach
that level; there will be a slight rebound in the other direction.
An interesting phenomenon is that once a resistance or support
point is broken, it tends to switch sides – a broken resistance
will often become a support for prices on the other side of
the line.
The most common calculation for arriving at a pivot point
is:
Pivot: (High + Close + Low)/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 numbers give me some points on which to base my strategy
for the day. If the market opens above the pivot point, it’s
a bull market, and most advisors would go for long trades,
since the direction of the market is up. If it opens below
pivot, it’s time to favor short trades and quick sales.
There are two common sales strategies using pivot, resistance
and support points.
Breakout
Trade: When a currency pair breaks through a resistance
or support point, there’s usually a surge of activity around
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 drops back from a high,
most traders will buy, based on other information that’s 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 inform your strategy in day trading
is a complex subject. You’ll find a great deal written about
it by various gurus and experts. These basics can help you
understand what you’re reading from them. # # # # # SolveYourProblem.com : 2007
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