There are many ways which this foreign exchange market can be traded and many at times, traders tend to neglect the simplest way to trade and make money from this market. While many traders end up concentrating more on the complex and difficult ways and in the long run THEY GIVE UP.
Today’s article might be lengthy for the lazy ones who never want to work hard for their success but for those who will read to the end, they will gain a method to subdue this market.
We will be discussing in this article how we can be profitable in the forex market by using pivot point though in the next article I will show traders how they could scalp the market using these pivot point and also how to place amazing orders in the market.
What are Pivot Points?
Pivot points are just simply supports and resistance. But these kind of support and resistance are different from the ones we discussed in how to draw support and resistance like a professional in forex.
These pivot point have their own calculations and are not drawn based on the trader’s assumption or sight. This is one of the reasons why most people prefer to use it because it gives a better idea on where financial institution and other “big guns” in the market may be entering and where they may be exiting also.
Over the years, pivot point has become more popular then when they were first used by financial traders in the exchange floor. Most trading terminals such as Trade View offer these tools for free and you can as well download many from MQL5 code base community.
How Are Pivot Point Calculated?
As many traders come across this powerful tool, they began to invent derivatives out of pivot point but I am not going to get you confuse by talking about these various types of pivot point. I will just list them and if you wish to further make research on them, than that’s a good idea. We have the:
- Classical or standard pivot point
- Camarilla pivot point
- Woodie’s pivot point
- Fibonacci pivot point
The above are the different types of pivot point and they have their own distinguished pivot point formula but in respect to this article, we will be using the classical or standard pivot point most times referred to as The Traditional Pivot Point. (Some platform refer to these two as separate entity of their own)
Though most trading platform will do these calculations for you it is highly recommended you have at least an idea on how they are being calculated.
The pivot points are made up of levels which serves as support and resistance as I have earlier said and there levels are:
- Pivot point (PP)
- Support 1 (S1)
- Support 2 (S2)
- Support 3 (S3)
- Resistance 1 (R1)
- Resistance 2 (R2)
- Resistance 3 (R3)
The formula for PP=High +Low +Close/3.
The Pivot Point which is denoted by PP is calculated by using the highest price, lowest price and closing price for the previous day candle stick.
The formula for R1= (2*PP) –Low
The value for the PP is multiply by 2 and then subtracted from the lowest price of the previous day that will give us our first support level.
The formula for the S1= (2*PP) –High
This is almost the same with the first resistance (R1) expect here, the highest price is used instead of the lowest price.
The formula for R2= (PP-S1) +R1
Resistance 2 is gotten by subtracting the S1 from the PP and then adding this value to R1, here, no data price is used.
The formula for S2 = PP – (R1 –S1)
The formula for S2 is the difference between R1 and S1 then subtracted from PP and again no price data used.
The formula for R3 = (PP –S2) +R2
To the level for R3 we get the difference between PP and S2 and add it to R2.
The formula for S3 =PP – (R2 –S2)
The value for S3 is gotten from the difference between the R2 and S2 and then subtracted from PP.
NOTE: the above are used for the plotting of the pivot point levels (support and resistance) on the chart although there are software/indicators that can do these for you.
Also price data means the OHLC which means open, high, low and close are gotten from the previous daily candle stick
ALSO READ: How Money is Made Trading The Forex Market
How to use the pivot point?
The pivot point has 7 levels viz. PP, S1, S2, S3, R1, R2, and R3. It is believe that the pivot point (PP) acts like “turning point” that is, when price break through the PP it is expected to keep going up but understand that this is not always true.
I have seen situations where price break the PP and then continue in the previous direction. I refer to this as false break out
If price break S1/R1, it is expect that S1/R2 will hold back price and if it eventually get broken the S3/R3 will do the job.
As a reminder, the pivot points are used mainly by intraday trader and the best time frame ranges from 1 minute to 1 hour and sometimes 4 hours but not always. If you wish to use it on a higher time frame such as the dailies then the price data (open, high, low and close) might be gotten from either weekly or monthly time frame.
But the most popular methods used are on time frame less than the 4 hours with price data from the dailies – that explains why it is used best by intraday traders.
Let me give a practical example on how this can be use while trading and how to increase your profits.
This screen shot was taken at the time this article was being written and we can see the PP which was denoted with a single P on the chart.
The chart above is a 30 minutes chart, while the one beneath is a 1 hour chart.
We saw how the PP held price from breaking through. We assumed that if price had broken off, it would have been a down trend but traders need to be careful about fake break out.
On the R1 we can see how it got broken easily and I suspect it to be the effect of news and our next hope is S2 which might likely hold.
The next example is USDJPY with a 30 minute chart
This chart is a very good example of a fake break out. Look at how price broke the PP level and kept testing that level. Looking at that PP level we can see that when the market opened, the level was being tested and later broke off many traders would have open a buy positions only for price to probably hit there Stop loss and I can tell that the reason why that last candle stick is bullish is because of the effect of the news.
The picture below is that of a 1 hour
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The next example is GBPUSD:
Remember when I said that if the first resistance or support doesn’t hold the next will? This is a practical example of it. Also you would have notice that price did not touch the PP lines that’s a red flag that something huge is coming.
The last example is AUDUSD 1 hour charts.
This is a good example of what I have been saying all along. Look at the chart and see how R1 held price from breaking off and later fell down to test the S1 which held.
If any trader had an open position within R1 and S1 I would have been in profit if and only if the stop loss is outside R1 and S2.
In summary, pivot points are a wonderful tool to use, if you understand how they work and also how price react when around these levels.
To master this tool, it is recommended to use it for some times. In my next article I will show us how we can use pivot point to place order, entries and also to scalp.
I would love to hear from you please do comment below and watch out for the next article.