PIVOT POINT ANALYSIS

[gabriel]

Hello,

I’m Gabriel one of the new owners of CIF. In this topic you will get information about how to use Pivot Points in foreign exchange trading.

If you are new in Forex Trading please visit Forex For Noobs section of our forum.

[gabriel]

As you know there are to ways of analyzing the forex market: Technical and Fundamental Analysis.

Personally, I think that for short term trading the Technical Analysis is very useful and the Pivot Points are indicators used in this theory.

Pivot points are based on a mathematical formula originally developed by Henry Wheeler Chase in the 1930s. Chester W. Keltner used part of the formula to develop the Keltner Bands as described in his book - How to Make Money in Commodities (Keltner Statistical Service, 1960).

However, it was really Larry Williams who was credited with repopularizing the analysis in his book - How I Made One Million Dollars Last Year Trading Commodities (Windsor Books, 1979). Don Lambert, the creator of the Commodity Channel Indicator (CCI) uses the pivot point formula

that makes the CCI work.

You can make develop your own trading methods using pivot point analysis combined with candlestick patterns, including the advantage of trading using multiple time frames, or what is know as a confluence of various target levels based on different time periods.

This topic will highlight those techniques as well as explain how to incorporate the pivot point as a moving average trading system and how to filter out and narrow the field of the respective support and resistance numbers and will divulge various formulas that are popular today.

Pivot points are a mathematical formula designed to determine the next time period’s range based on the previous time period’s data, which includes, the high, the low, and the close or settlement price

Using these variables from a given time period’s range is that will reflect all market participants’ collective perception of value for that time period. The range, which is the high and the low of a given time period, accurately reflects all market participants’ exuberant bullishness and pessimistic bearishness for that trading session. The high and the low of a given period are certainly important, as they mirror human emotional behavior. Also, the high is a reference point for those who bought out of greed, thinking that they were missing an opportunity. They certainly won’t forget how much they lost and how the market reacted as it declined from that level.

The opposite is true for those who sold the low of a given session out of fear they would lose more by staying in a long trade; they certainly will respect that price the next time the market trades back at that level, too. So the high and the low are important reference points. With that said, the pivot point calculations incorporate the three most important elements of the previous time period: the high (H), the low (L), and, of course, the close © of a given trading session. First, let me give you the actual mathematical calculations, and then I will go over what each level represents.

Pivot point

the sum of the high, the low, and the close divided by three.

P = (H + L + C)/3

Resistance 2 (R-2)

pivot point number plus the high minus the low.

R-2 = P + H – L

Resistance 1 (R-1)

pivot point number times two minus the low.

R-1 = (P × 2) – L

Support 1 (S-1)

pivot point number times two minus the high.

S-1 = (P × 2) – H

Support 2 (S-2)

pivot point number minus the high plus the low.

S-2 = P – H + L

Some analysts are adding a third level to their pivot calculations to help target extreme price swings that have occurred on certain occasions, such as a price shock resulting from a news event. You can notice that the spot forex currency markets tend to experience a double dose of price shocks because they are exposed to foreign economic developments and U.S. economic developments that pertain to a specific country’s currency.

This tends to make wide trading ranges. Therefore, a third level of projected support and resistance was calculated.

Resistance 3 (R-3)

the high plus two times (the pivot minus the low)

R-3 = H + 2 × (P – L)

Support 3

the low minus two times (the high minus the pivot)

S-3 = L – 2 × (H – P)

or

R-3 = P – S-2 + R-1

S-3 = P – R-2 – S-1

There are other variations that include adding the opening range, which, in this case, would involve simply taking the sum of the high, the low, and the open, and the close and dividing by four to derive the actual pivot point.

P = (O + H + L + C) /4

Since there is no formal closing and opening range, forex traders can use the N.Y. bank settlement as the close at 5 P.M. (EST) and assign the next

day’s session open as 5:05 P.M. (EST).

The following list shows what these numbers represent, how price action reacts with these projected target levels, how the numbers would break down by order, what typically occurs, and how the market can behave at these levels. Keep in mind that this is a general description, and we will learn what to look for at these price points to spot reversals in order to make money. I must stress that it is important to look at the progressively higher time period’s price support or resistance projections; for example, from the daily numbers, look at the weekly figures; and then from the weekly numbers, look at the monthly numbers. The longer the time frame, the more important or significant are the data. Also, it is rare that the daily numbers trade beyond the extreme R-2 or S-2 numbers; and when the market does, it is generally in a strong trending condition. In this case, we have methods to follow the market’s flow, and we will cover them in more detail in the next few chapters. Remember, pivot point analysis is used as a guide; these numbers are not the holy grail. By focusing on just a few select numbers and learning how to filter out excess information, I eliminate the analysis paralysis from information overload.

Resistance Level 3

This is the extreme bullish market condition generally created by news-driven price shocks. The market is at an overbought condition and may offer a day trader a quick reversal scalp trade.

Resistance Level 2

This is the bullish market price objective or target high number for a trading session. It generally establishes the high of a given time period. The market often sees significant resistance at this price level and will provide an exit target for long positions.

Resistance Level 1

This is the mild bullish to bearish projected high target number. In low-volume or light-volatility sessions or in consolidating trading periods, this often acts as the high of a given session. In a bearish market condition, prices will try to come close to this level but most times will fail.

Pivot Point

This is the focal price level or the mean, which is derived from the collective market data from the prior session’s high, low, and close. It is the strongest of the support and resistance numbers. Prices normally trade above or below this area before breaking in one direction or the other. As a general guideline, if the market opens above the primary pivot be a buyer on dips. If the market opens below this level, look to sell rallies.

Support Level 1

This is the mild bearish to bullish projected low target number in light-volume or low-volatility sessions or in consolidating trading periods. Prices tend to reverse at or near this level in bullish market conditions but most times fall short of hitting this number.

Support Level 2

This is the bearish market price objective or targeted low number. The market often sees significant support at or near this level in a bearish market condition. This level is a likely target level to cover shorts.

Support Level 3

In an extremely bearish market condition, this level will act as the projected target low or support area. A price decline to this level is generally created by news-driven price shocks. This is where a market is at an oversold condition and may offer a day trader a quick reversal scalp trade.

Weekly and monthly time frames can and should be utilized as well as the daily numbers you may be used to or have heard about in the past. To

understand how price moves within the pivots, begin by breaking down the time frames from longer term to shorter term. As traders, we should begin with a monthly time frame, where there is a price range or an established high or low for a given period. This range, with its price points, is what we

as traders should be looking for. Here is how I utilize the range in my research.

There are approximately 22 business days, or about 4 weeks, in each month. Every month there will be an established range - a high and a

low. There are typically five trading days in a week. Now consider that in one day of one week in one month, a high and a low will be made. It is likely that this high and low may be made in a minute or within one hour of a given day of a given week of that month. That is why longer-term time

frames, such as monthly or weekly, should be included in your market analysis. In the world of 24-hour trading, the most popular question I get from those studying and using pivot points is, “What are the times that you derive the high-low-close information?†There are many different people telling many different stories. Here is what I do and what seems to work the best for me. For starters, just keep things simple, and apply some good oldfashioned common sense. If the exchanges and the banking system use a specific time to settle a market, then that is the time period that should be

considered for a “close.†They should know those are the rules that make money move. I want to follow the money flow and be on the same time schedule as the banks and institutions, so here are a few pointers:

- Use the 5 P.M. (EST), New York bank settlement close to determine pivots.

- For the weekly calculations, take the open from Sunday night’s session and use the close on Friday.

- For the monthly calculations, take the opening of the first day of the month and the close from the last day of the month.

[wizardalltime]

thanks man pivot is really good i have already using it for a while before but i changed it because it failed me on Friday`s . the price can hit and cross r1 and go back to cross s1 .

[bulastika]

Its really good information. But me I only use Technical Analysis and I don't use Fundamental Analysis. I only use Technical and Fundamental Analysis in stocks trading. But in forex. How can you use fundamental? the trading is so fast that its appropriate to use technical analysis. Beside theirs no stock dividend like in stocks trading. That why you can use fundamental analysis in stocks because even if price don't chance you can still earn via dividend.

[Estella]

Yeah you are right fundamental analysis help a trader to foresee and determine the development in the price trends of currencies, based on which, he attempts to predict market changes and make profits.

Forex | Trade Forex | Forex Trading

[Katt-Flapy]

Your place is valueble for me. Thanks!…

[katie27]

That something a great view on Pivot Point, it is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels.

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[wilomr11st]

thanks man pivot is really good i have already using it for a while before but i changed it because it failed me on Friday`s . the price can hit and cross r1 and go back to cross s1 .&nbsp

Edited August 5, 2012 by wilomr11st

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[euggen77]

Pivot - this is a very rough level, because it is calculated mechanically. Correct to consider e minimum and maximum price.

[felisterjack]

Daily Nifty Forecast free update on Gold USDINR commodities world mkts

[samuel_p80]

hello anyone here.., have you try to use pivot point analysis???.
Is this strategi better then other??

[kurniawan]

Hello all....

How many percent of successful traders uisng pivot analysis???

I've tried using this kind one, but i always lost there...

[kurniawan]

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Hello guys,,,

What's kind schematic of this??

[mak123]

A pivot point is a
price level of significance in technical analysis of a financial market that
is used by traders as a predictive indicator of market movement. A pivot
point is calculated as an average of significant prices (high, low, close)
from the performance of a market in the prior trading period. If the market
in the following period trades above the pivot point it is usually evaluated
as a bullish sentiment, whereas trading below the pivot point is seen as
bearish.

[mak123]

A pivot point is a price level of significance in technical analysis of a financial market that is used by traders as a predictive indicator of market movement. A pivot point is calculated as an average of significant prices (high, low, close) from the performance of a market in the prior trading period. If the market in the following period trades above the pivot point it is usually evaluated
as a bullish sentiment, whereas trading below the pivot point is seen as bearish.

[deadman]

pivot is good for our trading business. it's a effective a indicator

[msmary]

we have pivot indicator with MT4 . we can use it for analysis . and we can analysis all currency

[robert11]

aud chf

http://forex-fa14.blogspot.com/

By having the harmonic pattern formed on the daily TF we are observing a price reversal. Later, we are expecting to see a drop to the bottom of the channel if the selling pressure persisted.

[kurniawan]

Trade using pivot is not as accurate as using EA. I recommend using EA. it would better.

[nurfakih]

I think that using Pivot Point is only for Long term trading..

It would be more better for long term trade.

[Andre Silva]

It is very easy but effective trading system. Maximum times, the market moved according to the pivot point. Therefore, if a new Forex trader just follow this trading method, surely he can earn enough money by this effective trading system.

[Haydar Ali]

I am sure that it is very simple but much effective trading strategy. Because, Forex market strongly follow the support and resistent points. I always follow the pivot points strategy. Now, I am a profitable Forex trader.

[msmary]

pivot help us get resistance and supportance. it is important for trader. i usually use it . it i great tool. i think trader should add it on their strategy. we will have better strategy

[nurfakih]

I am sure that it is very simple but much effective trading strategy. Because, Forex market strongly follow the support and resistent points. I always follow the pivot points strategy. Now, I am a profitable Forex trader.

Yeah, market will follow support and resistant, but to decide the best and accurate of support and resistant is really thoughtful..

Not all trader will able to trade using this style.