What do we mean by pivot point trading? It simply means that Forex traders take into account pivot points calculated from the previous day's trading range and use them as reference points to identify support and resistance levels.
Taking the high, low, close and open values of the previous day's price action, strategic levels can be identified which may or may not have an influence on price action. Pivot point trading puts emphasis on these levels, and uses them to guide entry and exit points for trades.
However, as with any technical indicator, there are limitations and pivot point trading, to be high probability, needs to stay within certain parameters. The following 7 guidelines can help pivot point trading be more profitable:
Pivot points should not be used as a standalone indicator. Do not enter or exit trades purely on the basis of pivot points. Use them in conjunction with other indicators such as candle patterns, Fibonacci levels, MACD, and moving averages to identify and confirm key levels of support and resistance which may provide trading opportunities.
While some traders living in various parts of the world may calculate their pivot points according to the time zone in which they live, a fairly safe standard for calculating the levels of pivot point trading is to use GMT (Greenwich Meantime).
Midnight GMT is a very quiet time in the market with very little volatility and provides a good opportunity to calculate more accurate pivot levels going from midnight GMT to midnight GMT the following day.
It is good to understand what is going on behind the scenes when it comes to pivot point trading. Rather than just staring at candles on a chart, understand what they actually represent.
Thousands of traders around the world, some working for large institutions and handling millions or even billions of dollars worth of currency, are taking positions according to previously established highs and lows in the market.
Pivot points draw attention to these key levels which will often be strongly defended by traders who have a lot at stake. This is the reason pivot point trading can be so successful, once a trader understands underlying reasons for price action.
It is good to calculate mid levels in addition to the S1, S2, R1, and R2 pivot levels. Sometimes there is a significant gap between these levels and calculating a mid point gives another point of reference. Price will often be seen respecting M1, M2, M3, or M4.
To calculate mid levels, simply subtract the level below from the level above and divide by 2. (see the resource box for a free pivot point calculator)
Pivot point trading can be a useful strategy for entering and exiting trades at the right time. A pivot point can provide a key level of support or resistance where price is likely to bounce for a 10-20 pip profit.
Or in the case of a trend, price may retrace to a pivot level before continuing its run. The retracement point at the pivot level would be a good place to put an entry order to be taken in when price comes back to retest at the pivot level.
The Euro - US dollar pair often puts in a daily average of between 75 and 100 pips. Watch for specific behavior around the time of the London market open. Price will often come back to test a level which is a pivot point and form a distinctive candle pattern such as tweezers, or a hanging man, and then reverse and go on its 75-100 pip run for the day.
If price comes back to the M1 level check your other indicators to see if they confirm this would be a good level to go long. Likewise, if price, just around London open, tests the M4 level, check your other indicators to see if this would be a good place to go short. You may be able to get a slice of the 75-100 pip run for the day.
Pivot point trading helps mentally in establishing the buy zone and the sell zone. Traditionally, anything above the Central Pivot Point is a Sell area, and everything below the Central Pivot Point is a Buy area.
If you go contrary to that, make sure you double check your analysis and have very good reasons for doing otherwise.
Pivot point trading is just one of an arsenal of weapons available to Forex market participants. However, it must be stated that many successful traders use just a handful of tools that become their favorites. After all, too many indicators can lead to decision paralysis.
For many traders, pivot points are a key element in their overall trading strategy. Use the 7 guidelines above to use them safely and responsibly.
For a free pivot point calculator, Fibonacci calculator and the best free economic calendars click here:
Click here to learn how to use another indicator, the 200 EMA, in a simple yet powerful way:
Do you know the important lesson Mohammed Ali teaches us about Forex trading? Read it here: