Use Pivot Points
June 1st, 2009
Learn forex Nitty Gritty. Discover a revolutionary new forex robot. Pivot points work in all markets that have established ranges and are considered to be a powerful technical tool in your arsenal. They are leading indicators. Most of the other indicators that you will use in technical analysis are lagging. Lagging means they are telling you about the past price action.
Pivot points are a simple mathematical calculation that determines the next time period’s range based on the previous time period’s data. It includes the high, the low and the closing price.
If you don’t know what is a range, then a range is the high and low of a given time period. Markets are just people buying and selling. The high represent the buyer’s exuberant bullishness. The low represents the seller’s pessimistic bearishness for that particular trading session.
A pivot point is that special line drawn in sand where most traders turn from being bearish to bullish or bullish to bearish. These points are used in currency trading to tell if the market sentiment has shifted from being positive/long to negative/short. If the price is trading above the point, you should take a long position. And if the price is trading below the pivot point, you should take a short position.
Now let’s calculate the pivot point. Pivot= (High+Low+Close)/3. You can use a 4 hour chart to calculate the next pivot point. Just plug in the values of high, low and close for the 4 hour session to calculate the next pivot point. Thus you can have 2 pivot points for each 8 hour session and 6 pivot points for the 24 hour session.
Take a long position as long as the price stays above the pivot point and trade a short position as long as the price is below the pivot point. The thinking behind the pivot points is simple yet powerful and highly useful. If the buyers are willing to pay more for a currency pair now than they were 4 hours ago, than at least for the time being the markets are bullish. Conversely, if the buyers are not interested in buying for the time being than for the time being the market will stay bearish.
Pivot point works as a filter for you. You should accept only buy entry signal if the price action is above the pivot point. And you should only accept the sell signal if the price action is below the pivot point. We have used the example of 4 hour charts. You can also use daily, weekly and monthly charts to calculate pivot points for those sessions.
You can determine the entry and exit for each position using pivot points. You can also use them in conjunction with other technical indicators. Pivot point analysis is a time tested, robust and a reliable market analysis tool.
Many new currency traders ignore learning pivot points considering them complicated. It’s a myth. They are very easy to use. Learn how to use them to determine the market sentiments in any timeframe you want to trade. But always keep this in your mind; it is only a guide. These numbers should not be taken as the Holy Grail. They can help you filter out excess information and avoid analysis paralysis from information overload.
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