When you learn about forex trading there are many technical tools to master, but one of the simplest to use is the pivot point. Pivot points work with support and resistance levels to give you an indication of entry and exit points for your foreign exchange trades.
The first thing to do when you plan to use this forex trading method is to identify whether the currency pair is currently in an upward or downward trend. This would mean you looking at patterns over several days or weeks. Of course, if you regularly trade the pair, then you probably already know which direction the trend is currently headed.
Once you know the trend, you will generally trade in that direction. So as long as the pivots indicate a long or buy order during an upward trend or a short or sell order during a downward trend, you can trade. But if they indicate the opposite, it is best to leave it well alone as it is extremely unpredictable at this stage and there would be too much risk of the trade going in the wrong direction in that scenario.
Pivot points are calculated from the last day’s trading high, low and closing prices. Most traders use the New York session closing time, but that would be a matter of your own preference. Whatever you choose to do you just must be consistent. So the pivot point is yesterday’s high plus low plus close, divided by 3. A very simple calculation, but it will be done automatically for you in your charting software.
Then the support and resistance lines are calculated in relation to that pivot point. You will see two of each on your chart. The first support line is twice the pivot point minus yesterday’s high. The second support level is the pivot point minus the high minus the low. Resistance lines are the equivalent in the other direction. Again, these calculations will be done for you.
You would then use that pivot point and levels for the whole of the current day’s trading, and recalculate tomorrow on the basis of today’s high, low and close.
Pivot points and their associated support and resistance lines are used in two main ways by forex traders. If you are trading within the range, you would enter a buy order at or near to the support level, and a sell order at or near to the resistance level. The levels can also be used with other indicators to identify a breakout.
Of course, as with any system, you should check your signal against at least one other indicator before trading. The MACD (Moving Average Convergence Divergence) crossover or stochastic overbought/oversold levels can be very valuable here. It is also a good idea to check several different time frames to ensure that the direction of the trend is clear.
The basis of pivot point trading is the assumption that prices will tend to fluctuate between the support and resistance levels, bearing in mind the effect of the current trend. The simplicity of this method can be very attractive when you are setting out to learn forex, and it can also be very effective. The above terms may take a while to sink in but when they do they will become second nature to you.
Source by James Roshwood