Simple Use Pivot Points to Trade Forex

[buysellorstayout]

What Are Pivot Points?

Pivot points are used by traders to attempt to predict support and resistance levels. They are commonly used in the forex market as are used as visual cues to execute trades.

Pivot Points are calculated using the open, high, low, and close, from the previous trading day. Standard pivot points include the pivot point itself, three full support levels, and three full resistance levels, but two half way support levels, and two half way resistance levels are also often included.

Daily pivot points are the most commonly used, but weekly and monthly pivot points are also available.

How to Calculate Pivot Points?

As you can see from the formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.

Calculation
Description: Pivot points are various calculations, made using the open, high, low, and close, from the previous trading day (Y).

PP = (YHigh + YLow + YClose) / 3
S1 = (PP * 2) - YHigh
S2 = PP - (YHigh - YLow)
S3 = (2 * PP) - ((2 * YHigh) - YLow)
R1 = (PP * 2) - YLow
R2 = PP + (YHigh - YLow)
R3 = (2 * PP) + (YHigh - (2 * YLow))

How to Use Pivot Points for Trading?

The main Pivot Level is the most important level (YHigh + YLow + YClose) / 3. The first way is for determining overall market trend. In a trading day, if the price opens under this level, it means the price has a stronger tendency to go down and Bears are stronger. So we can take a short (sell) position. If the price opens above the Pivot Level, it means Bulls are stronger and we can take a long (buy) position. All other levels may work as support and resistance and so we have to be careful when the price reaches them.

The second method is to use pivot point price levels to enter and exit the markets. The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. By the time the market reaches R2, R3 or S2, S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

Pivot points are especially useful to short-term traders who are looking to take advantage of small price movements.

Why do Pivot Points work?

First, Pivot points outperform other trading techniques and indicators also because they are predictive as opposed to lagging.

Second, Pivot points are based on the existence of support and resistance levels. These levels receive full attention from the vast majority of professional traders who trade on behalf of all kinds of large, medium, small financial institutions, funds as well as for themselves. Because so many traders worldwide use Pivot points for trading, Forex market reacts at these levels in a quite predictable manner, respecting support and resistance levels and creating a lot of trading opportunities.

I hope you enjoyed this article and learned something from it

 

[buysellorstayout]

Date: 6th June 2008
Currency Pair: GBP-USD

On 6 June, the GBP-USD opened at 1.9585, which is higher than the Pivot point (1.9547). This means the price has a stronger tendency to go up and we can take a long (buy) positions.

Prices dipped to the Pivot at 1.9547 offering some support for a few hours before resuming upwards, breaking through first Resistance @ 1.9635. A long position could have been established at this Break and within an hour, hits R2 at 1.9683 for a quick 40+ pips.

 

[trendie]

thanks for your informative posts on Pivots.

forward testing would be most useful. however, please ensure you also describe the stop-losses used. the 40-pip win above needs to be put into context of how many pips would you be willing to risk for it.

one downside of pivots is the assumption of daily range. an ordinary daily range cannot predict tomorrow being a wildly wide ranging day, eg, average range for GBPUSD may be 120 pips, but that cant predict that tomorrow wont be 220 pips.

equally, a small range day today will incorrectly predict a small range day for tomorrow, since the projected pivots for tomorrow are a function of todays activity. eg, today may have an unusually small range of 70 pips, and falsely predict an equally small range day tomorrow.

in actual fact, small range days, or even a couple together, may foretell a big move in the offing, so taking profits at S2/R2 may mean missing a big move.

so, pivots may work, only if tomorrow will have the same range as yesterday.
as with all ideas, knowing when not to use pivots is as useful as knowing when to use them.

I remember doing some work on pivots a couple of years ago, and used average daily range of past 2, 3 and 4 days to get some sort of balance between small/large days. no edge found by me.

however, when a day is really small (25% or more smaller than normal range), applying a breakout strategy may give you a better edge.

look forward to further posts from you.

 

[luckyd1976]

Some traders have sworn by pivots for years but the funny thing is there's 3-5 different ways to figure pivots so nobody ever gets the same numbers.

Main 3 pivot systems I know of are
P=(H+L+C)/3
P=(H+L+O)/3
P=(H+L+O+C)/4

BuySellorStayHome,

What was your reasoning for choosing you PivotPoints? I never could figure out which PP was the right one so I stayed away and decided to focus my energy on breakouts of price action instead.

 

[Stuart14]

Hi guys,

Can I ask, on average how many pairs do you work the Pivot Points Supports and Resistences out for each day?

Just wondering if using the 7 pairs is enough, or should I look to view more?

 

[buysellorstayout]

thanks for your informative posts on Pivots.

forward testing would be most useful. however, please ensure you also describe the stop-losses used. the 40-pip win above needs to be put into context of how many pips would you be willing to risk for it.

one downside of pivots is the assumption of daily range. an ordinary daily range cannot predict tomorrow being a wildly wide ranging day, eg, average range for GBPUSD may be 120 pips, but that cant predict that tomorrow wont be 220 pips.

equally, a small range day today will incorrectly predict a small range day for tomorrow, since the projected pivots for tomorrow are a function of todays activity. eg, today may have an unusually small range of 70 pips, and falsely predict an equally small range day tomorrow.

in actual fact, small range days, or even a couple together, may foretell a big move in the offing, so taking profits at S2/R2 may mean missing a big move.

so, pivots may work, only if tomorrow will have the same range as yesterday.
as with all ideas, knowing when not to use pivots is as useful as knowing when to use them.

I remember doing some work on pivots a couple of years ago, and used average daily range of past 2, 3 and 4 days to get some sort of balance between small/large days. no edge found by me.

however, when a day is really small (25% or more smaller than normal range), applying a breakout strategy may give you a better edge.

look forward to further posts from you.

Point noted...Thanks

 

[buysellorstayout]

What was your reasoning for choosing you PivotPoints? I never could figure out which PP was the right one so I stayed away and decided to focus my energy on breakouts of price action instead.

I think the correct pivot formula would be the one you decided and stick to it.

If you trade breakouts, then PP could be used as a guide to provide a general trend for the day and the Rs and Ss for entries & exits...