Learn How to Trade with Forex Pivot Points

Using Forex Pivot Points in Forex trading as part of a trading strategy or as a forex pivot point signal, has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.

The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are calculated. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.

Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to use pivot points.

The reason trading with pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the today.

Because so many Forex traders follow pivot points you will often find that the market reacts at these levels creating a trading opportunity.

It is not necessary to reinvent the wheel everyday and do manual calculations. Here is a link to a desktop calculator you can use on your pc. http://www.stelaronline.com/resource/pivot.htm by just adding your previous days high low and close this calculator will do the calculation for you. The following is the calculation for those who are interested

Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)

As you can see from the above 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.

Chart 1

As I said there is more than one way to trade PP’s

At the start of the day the market was above the PP level and rallying up. So we could have traded the market long on the break of the R1 Targeting the R2 which was not a huge trade to begin with. The market duly broke the R1 but failed to achieve the R2 level.

This Trade could have resulted in no more than a 10 pip profit.

The market started to drop and fell below the R1 then retraced back to the Trend line which it tested twice and failed. This was the clue that we could start looking at a short trade on the break of the R1 targeting first the PP and then the S1. We enter at the R1 with our stop 15 points above. When the Market reaches the PP we can tighten our Stop loss to break even and sell of half the lots and let the rest ride till the S1. for a 61 point Trade.  We could also have let the trade run on in the anticipation a larger profits as once the market breaks a support or resistance level its tendency is to challenge the next level.

Used with our other indicators PP’s can be a powerful trading tool. Just remember though that because these levels are predictive and most of your normal indicators lag the market there Might not always be convergence of the two. The signal is a break or a stall at a level and your indicators should only be for confirmation.

Chart 2

If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.

The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points are 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.

A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.

First set your chart to a daily time Frame. Enter your H, L, C into your pivot calculator.

This is today’s chart we are looking at. H 1.1773 L 1.1659 C 1.1691 represents yesterday’s moves. The market was in a bit of consolidation in the channel between the PP and the S1 level. We could have traded this as a break out by placing a buy 15 points above the PP level and targeted the R1 and our stop 10 points below the PP.

Or we could have traded this as a continuation of the current down Trend by placing our sell order at the PP with our stop 15 pips above the pp and targeted the S1 for profit. Many traders would put their stops above the S2. This would depend on your equity management.

The market dropped all the way to the S1 our initial Target. If you were trading more than one lot you could have exited half your lots and let the balance run in case the market continued short and tightened your stop to just above the down Trend Line. This trade yielded 65 points. Bearing in mind also that both the MVA and MACD confirmed the short Trade.

For more in-dept information visit Professional trader and author Peter Bain’s Video Forex Trading Course that demonstrates simple yet powerful Pivot Currency trading systems used by professional traders.

Online Forex Pivot Calculators can be found here:

http://www.aboutforex.com/pivot.html
http://www.forextechniques.com/pivotcalc.html
http://www.futurestrade.com/
http://www.fxstreet.com/conversor/fppc/fppc.asp
http://www.occkw.com/english/pivot_calculator.htm

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