Pivot Points Background
In recent years pivot points have become a very well known and widely used technical analysis tool. Key to understanding pivot point levels is the idea of support and resistance. Support and resistance levels give traders a visual gauge of pressure points within the market, specifically at certain price levels.
Summary of Support & Resistance:
To summarize the above, support levels are considered levels at which price decline is continually rejected. Conversely, resistance levels are considered levels at which price increase is continually rejected. Traders looking at a support level and resistance level in conjunction with one another are essentially examining what is referred to as a channel. It is very common to see price trends within the bounds of trading channels; meaning that for hours, or perhaps days at a time, a currency may trade within the bounds of support and resistance levels. Many times throughout a trend the price may test either the support or resistance level, but ultimately if the price is to remain within the channel the support and resistance levels will be tested, but not pushed through.
Using Support & Resistance to Trade:
Traders watching support and resistance levels are generally looking for one of the following trading opportunities:
Understanding the Pivot Point Difference:
As is explained above, there are multiple scenarios in which a trader might utilize support and resistance levels as a means to indentify key entry and exit points. Pivot points are very similar to support and resistance levels, in fact, pivot points are simply a series of support and resistance levels, with the inclusion of a median price level. Standard pivot points include 5 levels (levels that are represented as distinct lines on your charts). The median level, or middle line of the 5, is called the pivot point'. The other 4 levels are found above and below the pivot point in the form of 2 support lines (S1 and S2) and 2 resistance lines (R1 and R2).
Calculating Pivot Points:
Pivot point calculations are actually quite simple. Key figures are derived from the open, high, low and closing price of the previous day's trading session. These figures should be based on trading days or sessions considered started and ended at 0:00 GMT (Greenwich Mean Time). GMT is used because of the global aspect of currency trading; with various markets (Australia, Asia, Europe, US) constantly opening and closing globally - a 24-hour-a-day market is created. GMT is used to mark the start and end of trading days because it is considered a globally central time.
As is the case with many technical analysis methods, strategies, and indicators - pivot points are far from an exact science. Though various trading methods were outlined above in the using support and resistance levels to trade' section, these methods are simply an outline of how a technical trader might use support and resistance or pivot points in their trading process. A seasoned trader would take into account other factors that will most certainly impact the market, a factor such as major fundamental indicators (news announcements). Pivot points may be completely irrelevant technically when trading right after a major fundamental news announcement. Traders should also consider other technical indicators, the overall trend of the currency pair, and the time frame of the chart they are analyzing pivots on in correlation with how long they plan to remain in an open position.
Typically, pivot points tend to work well if traders understand a few of the following tips, tips that might otherwise only be learned from rough experience.