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CO15 - Introduction to Forex Pivot Points

"Pivot points are some of the tools used by traders when it comes to technical analysis. Using pivot points, traders project the potential price levels. These levels are calculated by analyzing the price action or the price behavior from the previous day or the previous session. There are many types of pivot points and the time frames that they are used for analysis. Typically, when one talks about pivot points, they are referring to the daily pivot points, which are derived from the price action from the previous day. Pivot points can act as support and resistance levels. They are widely used alongside other technical indicators to identify potential areas of reversals in price. In this article, we take a look at what pivot points are all about and also give some insights into how traders started to use pivot points. In the next sections of this series, we will then dig deeper into understanding the different types of pivot points that are available."

Pivot points are one of the most widely used tools among intraday traders. Pivot points are used not just in the forex markets but also across a wide range of markets covering commodity futures to stocks.

Pivot points are the name says, are points or price levels plotted on the price chart. The concept of pivot points traces its origins to pit trading. Before the advent of electronic trading, most of the trades were conducted face to face in a trading pit.

In these times, traders draw upon some simple technical analysis tools. The pivot points are a result of these analysis. They are mathematical in nature and are reference points. The pivot points are calculated based on how price behaved the previous day.

Now a days, pivot points are calculated across different time frames. While the daily pivot points are the most commonly used, you can also find weekly or even monthly pivot points.

Unlike most technical indicators, pivot points are neither predictive nor reactive in nature. They are simply price levels that are plotted on the chart where price is expected to reach or react to.

Day traders make use of pivot points to help in drawing out the support and resistance levels. There is nothing magical about pivot points. The reason why pivot points can work is because many traders watch these levels. Thus, pivot points become a form of a self-fulfilling prophecy.

Depending on how price is trading and the pivot point in question, price can reverse direction or simply breach past the pivot level until it moves to the next pivot point.

If you are looking to understand support and resistance, starting with pivot points are most ideal. These levels are drawn upon automatically. Most technical charting platforms do all the math for you and it results in the pivot points being plotted on the charts.

The chart below shows the pivot points in action.

CO15 01 Pivot points

Example of pivot points

 

Using the pivot points in isolation does not yield much information. Therefore, traders often combine the pivot points alongside other technical indicators. Typically, these indicators can be either moving averages or volatility bands. They can also include oscillators which measure momentum in price and thus show when the price of an asset is overbought or oversold.

Traders then use this information along with the pivot points to see whether price will reverse at any of the pivot points.

Traditionally, pivot points are made up of three levels. These include three support levels and three resistance levels. The mid level is known as the pivot point. This is where traders expect price to gravitate towards.

Depending on whether the underlying momentum is bullish or bearish, price can then reach out to the resistance levels or drop to one of the support levels. Of the three resistance and support levels, the third levels of resistance and support are considered to be the strongest.

But this is not a hard and fast rule. There are many instances when price can breach past the third level of support or resistance.

As we mentioned, pivot points are based on past price behavior. Therefore, the pivot point is a great example of technical analysis. By analyzing the price level for the previous day, the pivot points are projected into the future.

It gives out the potential price levels where there is a high probability for price to react in some form or another. This of course depends on the trend.

As you can see, building the market context is essential to trading. The pivot points are no exception either. When you combine the information from the pivot points alongside other technical indicators, you get a better view of the markets.

This can also lead to potentially lucrative or high probability trading set ups.

The pivot points can also be plotted on the H4 and daily time frames. Of course, the pivot levels here show the monthly or the weekly pivot points. As it is obvious, the weekly and monthly pivot points are more important than the daily pivot points.

Some traders also use these pivot points in addition to the daily pivot levels to get more understanding about the markets. But using too many pivot points can make your chart cluttered and could confuse you in your analysis of the markets.

Therefore, traders should find a pivot point that suits their trading requirements. For example, if you are trading the 15-minute chart, it is better to use the daily pivot levels than the weekly or monthly pivot levels and so on.

In the next section, we will look into more detail about pivot points and how they are calculated.

Read 670 times Last modified on Monday, 08 July 2019 08:58

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