In my last post, we went over why you should establish support and resistance lines for your forex trades. Today, I am going to show you one of the ways to predict where to establish these lines. We are going to use forex pivot points to get this done.
So before we get into the nuts and bolts of this, what exactly are forex pivot points?
A pivot point is a technical indicator derived by calculating the numerical average of a particular stock’s high, low and closing prices. A technical indicator derived by calculating the numerical average of a particular stock’s high, low and closing prices.
In layman's terms, all that means is that you establish pivot points from yesterday's averages (or whatever time line you are using) to "guesstimate" what the support and resistance line will be on the current day.
The reason I say "guesstimate" is because that is exactly what it is. There is no hard set of rules of what is right and what is wrong when establishing pivot points and therefore, forex pivot point strategies should be used with other technical indicators as well.
What makes analyzing forex pivot points so popular is because it is a leading indicator as opposed to a lagging indicator. As they say, we all have 20/20 hind sight and it is easy to look back and analyze what happened....It is a complete different story to be able to predict the future...
Forex Formula time
As you can imagine, there are some standard formulas to use when guesstimating the pivot points. The 5 point system is probably the most used.... You are going to need just 3 numbers in order to try to predict the forex trends of the day...
Now, that we have our pivot point, we can now start to crunch the numbers to accurately how the market is going to move....
Let's get our first resistance level....(we are going to call it R1)
R1 = (Pivot Point x 2) -Low
Now, let's get a second resistance level...(we are going to call it R2)
R2 = (Pivot Point + High) -Low
Let's move on and do the same thing with our Support lines...(S1)
S1 = (Pivot Point x2) - High
And do it again for the second support point
S2 = (Pivot Point -high) + Low
So, I am sure at this point you are wondering, 'I got the numbers, now what?'
Understand this, the three most important numbers for your forex trading (or any trading for that matter in relation to pivot points) is the actual pivot point and the resistance 1 (R1) and support 1 (S1) numbers.
In a perfect setting the R1 and S1 numbers will typically hold unless there is a breakout. The resistance 2 and support 2 numbers are both good numbers to aim for as both tend to be slightly lower than the first set of numbers.
I want to say that many beginner forex traders want to believe that there is a forex magic bullet. You know, a set of indicators that will accurately predict the market time and time again. If you have been trading for a any amount of time, you would know that. And these forex technical indicators are used to get a good idea of where the market is headed. A lot of newbie forex traders get into this frame of mind that they can find one set of indicators that will accurately predict which way the market is going to move...
That said, consider the pivot point as the average of the previous session's trading range combined with the closing price.
So, you probably have gathered that when you do the math, you can guesstimate (with decent accuracy) the range of the market today based on the past performance of the currency pair that you are dealing with. So, we aren't necessarily trying to predict the future of the forex market....we are just trying to get a good idea of where the market could go in the market based on where it's been.
In other words, you can use forex pivot points to find overall trends in the markets.
In closing, I am going to leave with a great quote from Arthur Sklarew who was a commodities broker....in this quote he mentions what most beginner trader's don't want to believe...that there is not one type of chart analysis indicator that is a magic bullet....However, chart analysis can give reliable forecasts of trends in the forex market. And that, my friends, is golden.
It should go without saying that while learning how to establish pivot points can help you understand how the forex market works and give you the ammunition to develop a gameplan as far as predicting support and resistance lines, forex pivot points are just a small part of the equation....in other words, you will have to find and use other forex indicators in addition to establishing pivot points. It is all in understanding the how's and why's as far as market movement is concerned. And Forex Pivot Points is just a small part of the large jigsaw puzzle into forex trading.
- High- This is the previous day's high
- Low- This is the previous day's low
- Close- This is where the forex market actually closed at (since the forex market is 24 hours, typically forex traders use the New York Market as the close of the day).
High + Low + Close/3 = our Forex Pivot Point.
Let's get our first resistance level....(we are going to call it R1)
R1 = (Pivot Point x 2) -Low
Now, let's get a second resistance level...(we are going to call it R2)
R2 = (Pivot Point + High) -Low
Let's move on and do the same thing with our Support lines...(S1)
S1 = (Pivot Point x2) - High
And do it again for the second support point
S2 = (Pivot Point -high) + Low
So, I am sure at this point you are wondering, 'I got the numbers, now what?'
Understand this, the three most important numbers for your forex trading (or any trading for that matter in relation to pivot points) is the actual pivot point and the resistance 1 (R1) and support 1 (S1) numbers.
In a perfect setting the R1 and S1 numbers will typically hold unless there is a breakout. The resistance 2 and support 2 numbers are both good numbers to aim for as both tend to be slightly lower than the first set of numbers.
I want to say that many beginner forex traders want to believe that there is a forex magic bullet. You know, a set of indicators that will accurately predict the market time and time again. If you have been trading for a any amount of time, you would know that. And these forex technical indicators are used to get a good idea of where the market is headed. A lot of newbie forex traders get into this frame of mind that they can find one set of indicators that will accurately predict which way the market is going to move...
That said, consider the pivot point as the average of the previous session's trading range combined with the closing price.
So, you probably have gathered that when you do the math, you can guesstimate (with decent accuracy) the range of the market today based on the past performance of the currency pair that you are dealing with. So, we aren't necessarily trying to predict the future of the forex market....we are just trying to get a good idea of where the market could go in the market based on where it's been.
In other words, you can use forex pivot points to find overall trends in the markets.
In closing, I am going to leave with a great quote from Arthur Sklarew who was a commodities broker....in this quote he mentions what most beginner trader's don't want to believe...that there is not one type of chart analysis indicator that is a magic bullet....However, chart analysis can give reliable forecasts of trends in the forex market. And that, my friends, is golden.
Technicians know very well that price chart analysis is not an exact
science. No single chart technique yet discovered is infallible. Despite
this lack of perfection, price chart analysis can very often give reliable
forecasts of trend direction . . . Confirmation is therefore an
essential component of every valid chart signal. In addition to comparing
price charts of different contract months and time scales, it
has been my experience that the accuracy of any technical price forecast
can be improved greatly by the application of a principle that I
call the “Rule of Multiple Techniques.”
The Rule of Multiple Techniques requires that the chart technician
not rely solely on one single technical signal or indicator but look
for confirmation from other technical indicators. The more technical
indicators that confirm each other, the better the chance of an accurate
forecast. The logic behind this rule is that, if individual timeproven
techniques tend to be right most of the time, a combination of
several such techniques that confirm each other will tend to be right
even more frequently.
It should go without saying that while learning how to establish pivot points can help you understand how the forex market works and give you the ammunition to develop a gameplan as far as predicting support and resistance lines, forex pivot points are just a small part of the equation....in other words, you will have to find and use other forex indicators in addition to establishing pivot points. It is all in understanding the how's and why's as far as market movement is concerned. And Forex Pivot Points is just a small part of the large jigsaw puzzle into forex trading.
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