Submit by JanusTrader (source www.forexoptical.com) 26/04/2012
We are going to show you the way we trade Forex using Pivot points.
We calculate Pivot points on daily basis using daily charts and then use those Pivot levels on 15 minute charts — our main charts — where we will look for entries, stops and exits.
We use 15 minute time frame because it allows catching the best entry and exit opportunities.
Understanding These Financial Units of Measurement
With hourly charts, for example, when the signal is there it is quite often already too late to react / enter.
We know we have to calculate Pivot points every single day, so that each morning we start with new fresh daily Pivot points, calculated from midnight to midnight EST.
Let's look at the current chart to see how Pivot points were found.
As you can see( in the picture below) we use only 5 major Pivot point levels: R2, R1, PP, S1 and S2.
After Pivots are in place traders should start taking notes:
First, they should note where the market has opened today in relation to the Pivot Point (PP): above the Pivot Point or below it.
The answer to this question provides the first clue about traders' biases for the day, e.g.
if the market has opened above Pivot Point, traders will be bias towards taking long positions, on the contrary, opening below the Pivot Point would suggests shorting for the day.
Then traders should look at how far the price opened from the Pivot (PP), and make extra notes when it opened below S1 or above R1 level which is considered to be a quite distant open.
With some small distance away from the Pivot Point it is considered to be a good morning for trading.
It is very much suggested to wait for a pull back towards the Pivot line before taking a position.
15 minute charts in this case help to catch the right moment for entry.
With the second — distant opening (below S1 or above R1) — we have very high expectations that the price will try to correct such "distant irregularity" and thus instead of progressing further away from Pivot Point it will try to move back towards the Pivot — the gold-middle point of the day. As a result, we will typically see a ranging market which does not produce much of the trading opportunities The expectations are that the price will revolve around Pivot Point for the rest of the day — nothing to do for us, we stay out.
We have daily Pivots on 15 minutes chart.
We wait for a pull back towards any of the closest Pivot levels, or, usually, towards the Pivot Point level.
In this case Pivot Point level acts as a support.
We don't enter on the touch of the Pivot Point line. Why?
Because we remember that the price do breaks through support / resistance levels, otherwise it would move constantly in one direction. So, instead of "jumping in fire", we wait.
Remember, before we actually see the price bouncing off the Pivot Point level, we can only expect it to do so.
What is a Pip or Point - Trading Terms
An expectation is not a good reason for entry. We need to see the price touching,stopping and then reversing. That's what we wait for.
Understanding Pivot Points
Another 15 minutes goes by and the situation clears: once we see a U-turn we enter!
Once the price has chosen a direction and we are in the trade, the first target is going to be the first level of support (downtrend) / resistance (in uptrend). What does that mean for us?
It means that when opening a position around the Pivot Point the first profit target can be set to R1 or S1 level regarding the price direction. The guarantee that the market will reach that first level is very-very high. It does reach those first levels almost 95% of the time!
You will be amazed how simple those quick profits are
In general a trading area around R1, S1 and Pivot Point itself is the easiest and most predictable area to trade in.
As we know from the theory once a level of support is broken it becomes a level of resistance.
Same for resistance, once broken — becomes support.
So, here come other Pivot levels such as S2 and R2.
Let's take an uptrend. When the price starts to move up from the Pivot Point it aims at R1 level first.
There the price usually meets a strong resistance which it needs to overcome before it can move any further.
Once above R1, what is the next target?
The next is R2. While aiming at R2, the price will have R1 level as its strong support now.
It may or may not come back one more time to test R1 level before moving further up.
While holding a position, it is a common rule: if the price didn't "see" the first support / resistance, e.g. goes quickly through it without noticing / stopping, do not exit the trade, set your profit target at R2 because the market shows strength and is capable to push the price further to the next level.
Typically, R2 becomes the highest point of the trading day.
However, R2 and S2 are not the ceiling for the price to stop at. During well trending market periods the price can move past those levels with no troubles at all.
If the market opens or trades at the extremes R2 or S2, the price will show a tendency to trade back toward the Pivot Point or even stop and go sideways.
Try to avoid buying at R2 or selling at S2.
A general rule for Pivot point trading can be set as:
The further the price moves away from a daily Pivot Point the lesser should be attempts to enter the market.
Try catching the market when it is close to the Pivot Point in the beginning of the day; and if came late, avoid entering for the current day.
That's basically the way how traders use Pivot points in Forex trading.
Although it sounds quite simple it requires a lot of attention and patience as well as mastering the technique of Pivot point trading.
Would you like to find out what happened later on the chart where we waited for clarification last time?
That day was very good, we made some healthy profits.
But, it is important to remember that although Pivots are so remarkably helpful, there is always risk
involved and not all 100% of trades turn out profitable.
Using stops to protect your capital is a very wise choice and taking losses when went wrong is an everyday trading routine. Being truly realistic about Forex trading is a huge step forward.