Pivot Point Trading- 7 Guidelines For Success
What do we average by pivot point trading? It simply method that Forex traders take into account pivot points calculated from the past day’s trading range and use them as reference points to clarify sustain and resistance levels.
Taking the high, low, close and open values of the past day’s price action, strategic levels can be identified which may or may not have an influence on price action. Pivot point trading puts emphasis on these levels, and uses them to guide entry and exit points for trades.
However, as with any technical indicator, there are limitations and pivot point trading, to be high probability, needs to stay within certain parameters. The following 7 guidelines can help pivot point trading be more profitable:
Pivot points should not be used as a standalone indicator. Do not go into or exit trades purely on the basis of pivot points. Use them in conjunction with other indicators such as candle patterns, Fibonacci levels, MACD, and moving averages to clarify and confirm meaningful levels of sustain and resistance which may provide trading opportunities.
While some traders living in various parts of the world may calculate their pivot points according to the time zone in which they live, a fairly safe standard for calculating the levels of pivot point trading is to use GMT (Greenwich Meantime).
Midnight GMT is a very quiet time in the market with very little volatility and provides a good opportunity to calculate more accurate pivot levels going from midnight GMT to midnight GMT the following day.
It is good to understand what is going on behind the scenes when it comes to pivot point trading. instead of just staring at candles on a chart, understand what they truly represent.
Thousands of traders around the world, some working for large institutions and handling millions or already billions of dollars worth of money, are taking locaiongs according to before established highs and lows in the market.
Pivot points draw attention to these meaningful levels which will often be strongly defended by traders who have a lot at stake. This is the reason pivot point trading can be so successful, once a trader understands inner reasons for price action.
It is good to calculate mid levels in addition to the S1, S2, R1, and R2 pivot levels. Sometimes there is a meaningful gap between these levels and calculating a mid point gives another point of reference. Price will often be seen respecting M1, M2, M3, or M4.
To calculate mid levels, simply subtract the level below from the level above and divide by 2. (see the resource box for a free pivot point calculator)
Pivot point trading can be a useful strategy for entering and exiting trades at the right time. A pivot point can provide a meaningful level of sustain or resistance where price is likely to bounce for a 10-20 pip profit.
Or in the case of a trend, price may retrace to a pivot level before continuing its run. The retracement point at the pivot level would be a good place to put an entry order to be taken in when price comes back to retest at the pivot level.
The Euro – US dollar pair often puts in a daily average of between 75 and 100 pips. Watch for specific behavior around the time of the London market open. Price will often come back to test a level which is a pivot point and form a distinctive candle pattern such as tweezers, or a hanging man, and then reverse and go on its 75-100 pip run for the day.
If price comes back to the M1 level check your other indicators to see if they confirm this would be a good level to go long. Likewise, if price, just around London open, tests the M4 level, check your other indicators to see if this would be a good place to go short. You may be able to get a slice of the 75-100 pip run for the day.
Pivot point trading helps mentally in establishing the buy zone and the sell zone. Traditionally, anything above the Central Pivot Point is a Sell area, and everything below the Central Pivot Point is a Buy area.
If you go contrary to that, make sure you double check your examination and have very good reasons for doing otherwise.
Pivot point trading is just one of an arsenal of weapons obtainable to Forex market participants. However, it must be stated that many successful traders use just a handful of tools that become their favorites. After all, too many indicators can rule to decision paralysis.
For many traders, pivot points are a meaningful component in their overall trading strategy. Use the 7 guidelines above to use them safely and responsibly.