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Using Pivot Points In Forex Trading Trading requires reference points (support and resistance ), which are used to determine when to enter the market, place stops and take profits. However, many beginning traders divert too much attention to technical indicators such as moving average convergence divergence (MACD) and relative strength index (RSI) (to name a few) and fail to identify a point that defines risk. Unknown risk can lead to margin calls. but calculated risk significantly improves the odds of success over the long haul. One tool that actually provides potential support and resistance and helps minimize risk is the pivot point and its derivatives. In this article, well argue why a combination of pivot points and traditional technical tools is far more powerful than technical tools alone and show how this combination can be used effectively in the FX market. Pivot Points 101 Originally employed by floor traders on equity and futures exchanges. pivot point have proved exceptionally useful in the FX market. In fact, the projected support and resistance generated by pivot points tends to work better in FX (especially with the most liquid pairs) because the large size of the market guards against market manipulation. In essence, the FX market adheres to technical principles such as support and resistance better than less liquid markets. (For related reading, see Using Pivot Points For Predictions and Pivot Strategies: A Handy Tool .) Calculating Pivots Pivot points can be calculated for any time frame. That is, the previous days prices are used to calculate the pivot point for the current trading day. Pivot Point for Current High (previous) Low (previous) Close (previous) 3 The pivot point can then be used to calculate estimated support and resistance for the current trading day. Resistance 1 (2 x Pivot Point) Low (previous period) Support 1 (2 x Pivot Point) High (previous period) Resistance 2 (Pivot Point Support 1) Resistance 1 Support 2 Pivot Point (Resistance 1 Support 1) Resistance 3 (Pivot Point Support 2) Resistance 2 Support 3 Pivot Point (Resistance 2 Support 2) To get a full understanding of how well pivot points can work, compile statistics for the EURUSD on how distant each high and low has been from each calculated resistance (R1, R2, R3) and support level (S1, S2, S3). To do the calculation yourself: Calculate the pivot points, support levels and resistance levels for x number of days. Subtract the support pivot points from the actual low of the day (Low S1, Low S2, Low S3). Subtract the resistance pivot points from the actual high of the day (High R1, High R2, High R3). Calculate the average for each difference. The results since the inception of the euro (January 1, 1999, with the first trading day on January 4, 1999): The actual low is, on average, 1 pip below Support 1 The actual high is, on average, 1 pip below Resistance 1 The actual low is, on average, 53 pips above Support 2 The actual high is, on average, 53 pips below Resistance 2 The actual low is, on average, 158 pips above Support 3 The actual high is, on average, 159 pips below Resistance 3 Judging Probabilities The statistics indicate that the calculated pivot points of S1 and R1 are a decent gauge for the actual high and low of the trading day. Going a step farther, we calculated the number of days that the low was lower than each S1, S2 and S3 and the number of days that the high was higher than the each R1, R2 and R3. The result: there have been 2,026 trading days since the inception of the euro as of October 12, 2006. The actual low has been lower than S1 892 times, or 44 of the time The actual high has been higher than R1 853 times, or 42 of the time The actual low has been lower than S2 342 times, or 17 of the time The actual high has been higher than R2 354 times, or 17 of the time The actual low has been lower than S3 63 times, or 3 of the time The actual high has been higher than R3 52 times, or 3 of the time This information is useful to a trader if you know that the pair slips below S1 44 of the time, you can place a stop below S1 with confidence, understanding that probability is on your side. Additionally, you may want to take profits just below R1 because you know that the high for the day exceeds R1 only 42 of the time. Again, the probabilities are with you. It is important to understand, however, that theses are probabilities and not certainties. On average, the high is 1 pip below R1 and exceeds R1 42 of the time. This neither means that the high will exceed R1 four days out of the next 10, nor that the high is always going to be 1 pip below R1. The power in this information lies in the fact that you can confidently gauge potential support and resistance ahead of time, have reference points to place stops and limits and, most importantly, limit risk while putting yourself in a position to profit. Using the Information The pivot point and its derivatives are potential support and resistance. The examples below show a setup using pivot point in conjunction with the popular RSI oscillator. (For more insight, see Momentum And The Relative Strength Index and Getting To Know Oscillators - Part 2: RSI .) RSI Divergence at Pivot ResistanceSupport This is typically a high reward-to-risk trade. The risk is well-defined due to the recent high (or low for a buy).The pivot points in the above examples are calculated using weekly data. The above example shows that from August 16 to 17, R1 held as solid resistance (first circle) at 1.2854 and the RSI divergence suggested that the upside was limited. This suggests that there is an opportunity to go short on a break below R1 with a stop at the recent high and a limit at the pivot point, which is now a support: Sell Short at 1.2853. Stop at the recent high at 1.2885. Limit at the pivot point at 1.2784. This first trade netted a 69 pip profit with 32 pips of risk. The reward to risk ratio was 2.16. The next week produced nearly the exact same setup. The week began with a rally to and just above R1 at 1.2908, which was also accompanied by bearish divergence. The short signal is generated on the decline back below R1 at which point we can sell short with a stop at the recent high and a limit at the pivot point (which is now support): Sell short at 1.2907. Stop at the recent high at 1.2939. Limit at the pivot point at 1.2802. This trade netted a 105 pip profit with just 32 pips of risk. The reward to risk ratio was 3.28. The rules for the setup are simple: 1. Identify bearish divergence at the pivot point, either R1, R2 or R3 (most common at R1). 2. When price declines back below the reference point (it could be the pivot point, R1, R2, R3), initiate a short position with a stop at the recent swing high. 3. Place a limit (take profit) order at the next level. If you sold at R2, your first target would be R1. In this case, former resistance becomes support and vice versa. 1. Identify bullish divergence at the pivot point, either S1, S2 or S3 (most common at S1). 2. When price rallies back above the reference point (it could be the pivot point, S1, S2, S3), initiate a long position with a stop at the recent swing low. 3. Place a limit (take profit) order at the next level (if you bought at S2, your first target would be S1 former support becomes resistance and vice versa). Summary A day trader can use daily data to calculate the pivot points each day, a swing trader can use weekly data to calculate the pivot points for each week and a position trader can use monthly data to calculate the pivot points at the beginning of each month. Investors can even use yearly data to approximate significant levels for the coming year. The trading philosophy remains the same regardless of the time frame. That is, the calculated pivot points give the trader an idea of where support and resistance is for the coming period, but the trader - because nothing in trading is more important than preparedness - must always be prepared to act. Trading Forex with Pivot Points Pivot Point Trading are used today by Forex Traders and are calculated on the previous days move and trades are entered when the market hits a support or resistance line of the pivot point providing your OBOS indicator is in agreement. All the support and resist lines are put in place 1st thing in the morning. then you wait for the market to hit those entry Points. Contrary to what some might believe, trading Forex with Pivot Points are probably the most popular method used in trading the financial markets today. Long before the invention of computers this was the method used by the traders in the pits to determine hidden support and resistance levels. The Pivot Point is still used by experienced floor traders and technical analysts alike. The major advantage now is that we now have computers and can calculate our points well in advance. Many charting packages can calculate them for you automatically, thus enhancing the use of Pivot Points. Whilst there is a lot more to Pivot Point Trading in Forex Trading than we will be mentioned in this article, the purpose of this exercise is to introduce you to the concept of trading Forex with Pivot Points. Remember the market can only go up, down, or sideways. It is like an elastic band that has been stretched, sooner or later it will rebound to an equilibrium point where the market is in balance, and then stretch the opposite way only to rebound and reach another balance point. Then some fundamental announcement or happening will drive the market in a new direction and so on day after day. Pivot Points can aid us in determining how far that elastic can stretch before it rebounds. Whilst there are many time frames that can be used for calculating Pivots, for the purpose of this exercise lets concentrate on the daily time frame (i. e. 24hr) Pivot Points are calculated using the previous days, Open, High, Low, and Close figures. There are many Pivot Point calculators available on the web so you dont have to waste your time doing the calculations manually. Also bear in mind the longer the time frame you are using the longer you must be prepared to stay in the market or wait for the next entry point. Pivot points unlike many other indicators are an objective tool. Because they are mathematically calculated, there can only be one answer for a specific time period. Many subjective indicators like Fibonacci retracements, (and I am a great fib fan) Elliot waves etc. can have different people trading in different directions at the same time due to individual interpretation. The PPs can help you to predict the next days highs and lows in advance. PPs can give you anything from 4 to 8 support and resistance levels. However you still have to be able to identify the trend to be a successful PP trader. Pivot Points also work best in a trending market. Entry and exit points Pivot Points can give you exact entry and exit points, rather than enter markets that are in the middle of a run, or about to turn the other way. Here is where we use other indicators to assist on the entry or exit. If the market stalls at a Pivot Point level, and you have an overbought or oversold indicator that will be a good time to get in or out. Or if a Fibonacci level coincides with a Pivot Point level it can make a strong case to enter or exit a trade. If the market is bullish and your favourite indicator is not near overbought, when it hits the first resistance level then you probably have a good case to stay in the market and make your profit target the next Pivot Point resistance line. The breakout above the 1st resistance level can then become your new stop or stop reverse. Obviously the reverse is true of the support level as well. By combining the Pivot Points with your favourite indicator you can develop your own trading system that no one else uses. Trading for the day will probably remain between the 1st support (S1) and resistance (R1) levels as the floor traders make their markets. Once one of these levels is penetrated other traders will be attracted to the market, and should the second level be breached, the longer term traders are attracted to the market. Knowledge of where the floor traders are expecting support or resistance can be a distinct advantage especially when there is no outside influence in the market. Provided no significant market news has occurred between yesterdays close and todays opening, the local floor traders and market makers tend to move the market between the Pivot Point (P) and the first support line (S1) and resistance (R1) If one of these levels is breached then expect the market to test the next levels (S2) and ( S3) or (R2) and (R3) Whilst there are many other aspects to Pivot Point trading why not try this simple method first and see if you can develop your own strategy by using your existing trading techniques in conjunction with the Pivot Points. by Eddie SieberhagenHow to use Pivot Points for Range Trading The simplest way to use pivot point levels in your forex trading is to use them just like your regular support and resistance levels. Just like good ole support and resistance, price will test the levels repeatedly. The more times a currency pair touches a pivot level then reverses, the stronger the level is. Actually, 8220pivoting8221 simply means reaching a support or resistance level and then reversing. If you see that a pivot level is holding, this could give you some good trading opportunities. If price is nearing the upper resistance level, you could sell the pair and place a stop just above the resistance. If price was nearing a support level, you would buy and put your stop just below the level. See Just like your regular support and resistance Nothing hard about that Let8217s take a look at an example so you can visualize this. Here8217s a 15-minute chart of GBPUSD. In the chart above, you see that price is testing the S1 support level. If you think it will hold, what you can do is buy at market and then put a stop loss order past the next support level. If you8217re conservative, you can set a wide stop just below S2. If price reaches past S2, chances are it won8217t be coming back up, as both S1 and S2 could become resistance levels. If you8217re a little more aggressive and confident that support at S1 would hold, you can set your stop just below S1. As for your take profit points, you could target PP or R1, which could also provide some sort of resistance. Let8217s see what happened if you bought at market. And bam Looks like S1 held as support What8217s more, if you had targeted PP as your take profit point, you would have hit your PT Woohoo Ice cream and pizza for you Of course, it ain8217t always that simple. You shouldn8217t rely only on the pivot point levels. You should note whether pivot point levels line up with former support and resistance levels. You can also incorporate candlestick analysis and other types of indicators to help give you more confirmation. For example, if you see that a doji has formed over S1, or that the stochastic is indicating oversold conditions, then the odds are higher that S1 will hold as support. Also, most of the time, trading normally takes place between the first support and resistance levels. Occasionally, price will test the second levels and every once in a while, the third levels will be tested. Lastly, you should also fully understand that sometimes, price will just break through all the levels like how Rafael Nadal breezes through the competition at the French Open. What will you do when that happens Continue to hold onto your trade and be a sucker and watch your account dwindle away Or will you take advantage and get back some pips In the next lesson, we8217ll teach you how to take advantage when these levels break down. Save your progress by signing in and marking the lesson complete