It is useful to have a map and be able to see where the price is relative to previous market action. This way we can see how the sentiment of traders and investors is at any given moment, and it also gives us a general idea of where the market is heading during the day. This information can help us decide which way to trade.
Pivot points, a technique developed by floor traders, help us see where the price is relative to previous market action.
As a definition, a pivot point is a turning point or condition. The same applies to the Forex market, the pivot point is a level in which the sentiment of the market changes from “bull” to “bear” or vice versa. If the market breaks this level up, then the sentiment is said to be in a uptrend or a bull market and this condition is likely to continue, on the other hand, if the market breaks this level down, then the sentiment is bear, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price can’t break the pivot point, a possible bounce from it is plausible.
Pivot points work best on highly liquid markets, like the spot currency market, but they can also be used in other markets as well.
Pivot Points
In a few words, pivot point is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.
Why do PP work?
They work simply because many individual traders and investors use and trust them, as well as bank and institutional traders. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.
Calculating pivot points
There are several ways to arrive to the Pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session).
Pivot point (PP) = (High + Low + Close) / 3
Take for instance the following EUR/USD information from the previous session:
Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458
The PP would be,
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439
What does this number tell us? It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. On both cases this condition is likely to sustain until the next session.
Since the Forex market is a 24hr market (no close or open from day to day) there is a eternal battle on deciding at white times we should take the open, close, high and low from each session. From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT.
Besides the calculation of the PP, there are other support and resistance levels that are calculated taking the PP as a reference.
Support 1 (S1) = (PP * 2) – H
Resistance 1 (R1) = (PP * 2) - L
Support 2 (S2) = PP – (R1 – S1)
Resistance 2 (R2) = PP + (R1 – S1)
Where , H is the High of the previous period, and L is the low of the previous period
Continuing with the example above, it the PP = 1.2439, then:
S1 = (1.2439 * 2) - 1.2474 = 1.2404
R1 = (1.2439 * 2) – 1.2376 = 1.2502
R2 = 1.2439 + (1.2636 – 1.2537) = 1.2537
S2 = 1.2439 – (1.2636 – 1.2537) = 1.2537
These levels are supposed to mark support and resistance levels for the current session.
In the next chart we have calculated the PP and the support and resistance levels for September 5th.
S2 = 1.2616
S1 = 1.2579
PP = 1.2545
R1 = 1.2508
R2 = 1.2474
PP represents a resistance on early September 5th (arrow 1). Notice also S1 rejected twice the price as it approached the S1 level (arrow 2 and 3), this represents good trading opportunities. Finally, S2 marked a good support (arrow 4), this indicates weakness on current bears, which tells us that the sentiment is not as strong as it was at the beginning of the trading session warning us to close any short position taken.
On the example above, the PP was calculated using information of the previous session (previous day). This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point in a weekly or monthly basis is mostly used by long term traders, but it can also be used by short time traders, it gives us a good idea about the longer term trend and the sentiment of traders over a longer period of time.
S1, S2, R1 And R2...? An Objective Alternative.
As already stated, the pivot point zone is a well-known technique and it works simply because many traders and investors use and trust it. But what about the other support and resistance zones (S1, S2, R1 and R2), to forecast a support or resistance level with some mathematical formula is somehow subjective. It is hard to rely on them blindly just because the formula popped out that level. For this reason, we have created an alternative way to map our time frame, simpler but more objective and effective.
We calculate the pivot point as showed before. But our support and resistance levels are drawn in a different way. We take the previous session high and low, and draw those levels on today’s chart. The same is done with the session before the previous session.
The psychology behind this approach is simple. We know that for some reason the market stopped there from going higher/lower the previous session, or the session before that. We don’t know the reason, and we don’t need to know it. We only know the fact: the market reversed at that level. We also know that traders and investors have memories, they do remember that the price stopped there before, and the odds are that the market reverses from there again (maybe because the same reason, and maybe not) or at least find some support or resistance at these levels.
What is important about his approach is that support and resistance levels are measured objectively; they aren’t just a level derived from a mathematical formula, the price reversed there before so these levels have a higher probability of being effective.
Let’s take a look at some charts:
Again, vertical lines separate between sessions. The first session (October 14th) makes a high of 201.90 and a low of 200.66. The next session (October 17th) makes a high of 201.98 and a low of 201.16. Notice that on October 17th, the previous session high (what would have been HOPS1) stops the price from going higher (arrows 1 and 2) reversing the price back to the middle of the range. The pivot point of October 18th is calculated from data of the previous session (October 17th). The market quickly makes it above the PP, indicating a bull sentiment. At first HOPS1 and HOPS2 offers a good resistance, stopping the price from going higher (arrow 3). After a while the market breaks both important levels, and gives us several opportunities to get long (arrows labeled 4). It’s important to understand that the price traded most of the time above the PP, signaling a possible trend, once the market breaks HOPS1 and HOPS2, we should only consider long trades, since trades in direction of the trend have a higher probability of success.
Here we have a sideways market:
Our mapping method can help you in three different ways: as a trend identification (measure of the strength of the trend), using important levels with price behavior as a trading signal and to set the risk reward ratio (RR) of any given trade.
Our mapping method works on both market conditions, when trending and on sideways conditions. In a trending market, it helps us determine the strength of the trend and combined with price behavior helps us trade off important levels. On sideways markets it shows us possible reversal levels. It also helps us to set the Risk Reward ratio based on where is the market relative to previous market action.
Pivot points, a technique developed by floor traders, help us see where the price is relative to previous market action.
As a definition, a pivot point is a turning point or condition. The same applies to the Forex market, the pivot point is a level in which the sentiment of the market changes from “bull” to “bear” or vice versa. If the market breaks this level up, then the sentiment is said to be in a uptrend or a bull market and this condition is likely to continue, on the other hand, if the market breaks this level down, then the sentiment is bear, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price can’t break the pivot point, a possible bounce from it is plausible.
Pivot points work best on highly liquid markets, like the spot currency market, but they can also be used in other markets as well.
Pivot Points
In a few words, pivot point is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.
Why do PP work?
They work simply because many individual traders and investors use and trust them, as well as bank and institutional traders. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.
Calculating pivot points
There are several ways to arrive to the Pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session).
Pivot point (PP) = (High + Low + Close) / 3
Take for instance the following EUR/USD information from the previous session:
Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458
The PP would be,
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439
What does this number tell us? It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. On both cases this condition is likely to sustain until the next session.
Since the Forex market is a 24hr market (no close or open from day to day) there is a eternal battle on deciding at white times we should take the open, close, high and low from each session. From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT.
Besides the calculation of the PP, there are other support and resistance levels that are calculated taking the PP as a reference.
Support 1 (S1) = (PP * 2) – H
Resistance 1 (R1) = (PP * 2) - L
Support 2 (S2) = PP – (R1 – S1)
Resistance 2 (R2) = PP + (R1 – S1)
Where , H is the High of the previous period, and L is the low of the previous period
Continuing with the example above, it the PP = 1.2439, then:
S1 = (1.2439 * 2) - 1.2474 = 1.2404
R1 = (1.2439 * 2) – 1.2376 = 1.2502
R2 = 1.2439 + (1.2636 – 1.2537) = 1.2537
S2 = 1.2439 – (1.2636 – 1.2537) = 1.2537
These levels are supposed to mark support and resistance levels for the current session.
In the next chart we have calculated the PP and the support and resistance levels for September 5th.
S2 = 1.2616
S1 = 1.2579
PP = 1.2545
R1 = 1.2508
R2 = 1.2474
http://www.forexfactory.com/pics/articles/sf1.JPG
PP represents a resistance on early September 5th (arrow 1). Notice also S1 rejected twice the price as it approached the S1 level (arrow 2 and 3), this represents good trading opportunities. Finally, S2 marked a good support (arrow 4), this indicates weakness on current bears, which tells us that the sentiment is not as strong as it was at the beginning of the trading session warning us to close any short position taken.
On the example above, the PP was calculated using information of the previous session (previous day). This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point in a weekly or monthly basis is mostly used by long term traders, but it can also be used by short time traders, it gives us a good idea about the longer term trend and the sentiment of traders over a longer period of time.
S1, S2, R1 And R2...? An Objective Alternative.
As already stated, the pivot point zone is a well-known technique and it works simply because many traders and investors use and trust it. But what about the other support and resistance zones (S1, S2, R1 and R2), to forecast a support or resistance level with some mathematical formula is somehow subjective. It is hard to rely on them blindly just because the formula popped out that level. For this reason, we have created an alternative way to map our time frame, simpler but more objective and effective.
We calculate the pivot point as showed before. But our support and resistance levels are drawn in a different way. We take the previous session high and low, and draw those levels on today’s chart. The same is done with the session before the previous session.
The psychology behind this approach is simple. We know that for some reason the market stopped there from going higher/lower the previous session, or the session before that. We don’t know the reason, and we don’t need to know it. We only know the fact: the market reversed at that level. We also know that traders and investors have memories, they do remember that the price stopped there before, and the odds are that the market reverses from there again (maybe because the same reason, and maybe not) or at least find some support or resistance at these levels.
What is important about his approach is that support and resistance levels are measured objectively; they aren’t just a level derived from a mathematical formula, the price reversed there before so these levels have a higher probability of being effective.
Let’s take a look at some charts:
http://www.forexfactory.com/pics/articles/sf2.JPG
Defining terms:
PP → Pivot point
LOPS1 → Low of the previous session
HOPS1 → High of the previous session
LOPS2 → Low of the session before the previous session
HOPS2 → High of the session before the previous session
Again, vertical lines separate between sessions. The first session (October 14th) makes a high of 201.90 and a low of 200.66. The next session (October 17th) makes a high of 201.98 and a low of 201.16. Notice that on October 17th, the previous session high (what would have been HOPS1) stops the price from going higher (arrows 1 and 2) reversing the price back to the middle of the range. The pivot point of October 18th is calculated from data of the previous session (October 17th). The market quickly makes it above the PP, indicating a bull sentiment. At first HOPS1 and HOPS2 offers a good resistance, stopping the price from going higher (arrow 3). After a while the market breaks both important levels, and gives us several opportunities to get long (arrows labeled 4). It’s important to understand that the price traded most of the time above the PP, signaling a possible trend, once the market breaks HOPS1 and HOPS2, we should only consider long trades, since trades in direction of the trend have a higher probability of success.
Here we have a sideways market:
http://www.forexfactory.com/pics/articles/sf3.JPG
How can this help me as a trader?Our mapping method can help you in three different ways: as a trend identification (measure of the strength of the trend), using important levels with price behavior as a trading signal and to set the risk reward ratio (RR) of any given trade.
Our mapping method works on both market conditions, when trending and on sideways conditions. In a trending market, it helps us determine the strength of the trend and combined with price behavior helps us trade off important levels. On sideways markets it shows us possible reversal levels. It also helps us to set the Risk Reward ratio based on where is the market relative to previous market action.
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Web: http://www.straightforex.com