Pivot points have been a vital technique or strategy used in Forex trading. In the earlier days, floor traders used to use these techniques to succeed. Yet such pivot points can be invaluable even today. Pivot points provide an invaluable method to gauge the trend of the market in general. Using few calculations and a little bit of mathematics, a floor trader could easily understand the direction of currency values.
You might want to start by asking 'What is a pivot point?' A pivot point refers to the point at which the direction of the market changes in the day. Using cues from the previous days' closing, high and low values, one can estimate the pivot point series. These points can infer both resistance as well as support levels. The points calculated from these series of points are known pivot levels. While most markets operate on a 24×7 basis, they tend to use the 5 PM time of EST for their closing and opening. You can use the information obtained to this time to calculate the pivot point. The pivot point has proved useful in estimating currency trends and patterns in Forex trading.
Market reactions rely heavily on pivot points. This is because a large majority of traders uses these points as a guiding aspect. If you find the market opening above a pivot point value, you can expect the remaining part of the day trading to be focused on short trades. You will typically need three pivot points normally R1, actual pivot value and S1. You would ideally need to check for any break or reversal in the values of S1 or R1. You need to use the pivot point values as an indicator of your exit times instead of entry times.
Pivot Points In Forex Day Trading
In the world of Forex trading market conditions change very frequently. The concept of pivot points is very useful but only certain tactics can apply in certain situations. This is where knowing which tactic to apply when becomes most important. Here are four ways in which pivot points can be used as per the situation.
1) Breakout trade: If the day began with being below pivot point value, then you would prefer short trades. You would want to also look for a break for values biased to the downside values. The entry order for selling in such a case would be below lower line of channel with the stop order being above line of upper channel.
2) Pullback trade: The market would typically pass through the S1 value and then come back in value. You need to place your entry order below support and then place your stop just above pullback.
3) Breaking out: In such a case you should place entry order above line channel of the upper value and the stop order below the value of lower line of channel.
4) Advanced: You can use the intersection of two sets of moving rates to determine the breakout. This is an advanced technique in Forex trading using pivot points.