Pivot Point Trading And Why Pivot Points Are So Important


Pivot Point Trading is a critical component to any trading method or system, if it’s not included you are doing a disservice to your trading. Here I’m going to highlight and show the importance of having a Pivot Point Strategy as part of your FX Trading toolbox, but first watch the video below.

Pivot points

Pivot point trading techniques were created by the Chicago pit traders way back before we all had online brokers and instant real-time chart analysis in our front rooms. These guys were fighting in the pits to be heard, seen and acted upon, the noise and confusion was totally overwhelming and remembering where all the significant levels of the previous day’s session were, was quite difficult. What the traders came up with was a Pivot Point system to help quickly forecast trends and likely areas of support and resistance. To do this they took the previous day’s high/low/close and divided the total by 3. There are other Pivot Point calculations but this still seems to be the simplest and most widely used, and I favour, but just Google for alternative Pivot Point calculation formulas.

Pivot Point Trading

Pivot Point trading gave traders a quick reference as to where likely areas of support or resistance would possibly be. The format was a Central Pivot Point, often deemed to be the fair price, followed by, to the upside R1, R2, R3 where R= Resistance and to the downside S1, S2, S3 and S= Support. Some traders would also use mid Pivot point or M levels starting from the bottom M0 to M5, so for example the M pivot point level between R1 & R2 would be M4.

Let’s be clear, Pivot Points are a leading indicator but Pivot Point techniques only worke because traders recognised them and reacted to them, in other words they became a self fulfilling prophecy. On their own pivot points are great but combine them with other areas of support and resistance, which overlap or provide what is referred to as confluence, becomes very, very powerful and significant indeed.

FX Trading and Why Use Pivot Point Trading

Trading Pivot Points is used by most professional traders across almost all instruments from stocks to Forex and back again and new traders need to be aware of this and understand exactly what a Pivot point is and how they are used, otherwise you will continue to look at your charts scratching your head wandering why price stopped and reversed where it did.

Many traders quickly start to look for more and more complicated solutions, methods or strategies to Trade Forex or any market effectively, often forgetting and dismissing the simple lessons learned at the beginning of their journey. The problem with most indicators is that they are lagging which basically means they react to price, where as a leading indicator, like a pivot point, is reacted to by Forex Traders, this is the main difference.

To close go back to basics and remember the market is driven by supply and demand and real people. No matter what the mathematicians will have you believe, people will react emotionally at significant areas of support and resistance and you as a trader need to know as much as you can when making trade decisions. Using a Pivot Point strategy will help you achieve that combined with your other tools for trading the Forex Market. Make sure to watch the video demonstrating Pivot Points in action.

 


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