ADVANCE
FOREX
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PowerupCapital Pte Ltd
PIVOT STRATEGIES
(USE PIVOT POINTS ALONG
WITH PARABOLIC SAR)
Copyright 2002-2010
PowerupCapital Pte Ltd
Pivot Strategies:
For many years, traders and market makers have
used pivot points to determine critical support and/
or resistance levels. Pivots are also very popular in the
forex market and can be an extremely useful tool
for range-bound traders to identify points of entry and
for trend traders and breakout traders to spot the key levels
that need to be broken for a move to qualify as a breakout.
We'll explain how pivot points are calculated, how they
can be applied to the FX market, and how they can be
combined with other indicators to develop other trading
strategies.
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PowerupCapital Pte Ltd
Calculating Pivot Points
By definition, a pivot point is a point of rotation. The
prices used to calculate the pivot point are the previous
period's high, low and closing prices for a security. These
prices are usually taken from a stock's daily charts, but the
pivot point can also be calculated using information from
hourly charts. Most traders prefer to take the pivots, as
well as the support and resistance levels, off of the daily
charts and then apply those to the intraday charts (for
example, hourly, every 30 minutes or every 15 minutes). If
a pivot point is calculated using price information from a
shorter time frame, this tends to reduce its accuracy and
significance.
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PowerupCapital Pte Ltd
The textbook calculation for a pivot point is as follows:
Central Pivot Point (P) = (High + Low + Close) / 3
Support and resistance levels are then calculated off of this pivot
point using the following formulas:
First level support and resistance:
First Resistance (R1) = (2*P) - Low
First Support (S1) = (2*P) - High
Likewise, the second level of support and resistance is calculated as
follows:
Second Resistance (R2) = P + (R1-S1)
Second Support (S2) = P - (R1- S1)
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Calculating two support and resistance levels is
common practice, but it's not unusual to derive a
third support and resistance level as well.
(However, third-level support and resistances are a
bit too esoteric to be useful for the purposes of
trading strategies.) It's also possible to delve
deeper into pivot point analysis - for example,
some traders go beyond the traditional support and
resistance levels and also track the mid-point
between each of those levels.
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PowerupCapital Pte Ltd
Applying Pivot Points to the FX Market
Generally speaking, the pivot point is seen as the primary
support or resistance level. The following chart is a 30minute chart of the currency pair GBP/USD with pivot
levels calculated using the daily high, low and close prices.
The green line is the pivot point (P).
The red lines are resistance levels (R).
The blue lines are support levels (S).
The yellow lines are mid-points (M).
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PowerupCapital Pte Ltd
Figure 1 shows how the pivot line served as support for the
GBP/USD for most of the European trading hours. Once
U.S. traders joined the market, however, prices began to
break higher, with each of the breaks first testing and
resisting either the mid-point or the R1 and R2 levels; then
the break occurred off of those levels (see areas circled).
This chart also shows something that occurs frequently in
the FX market, which is that the initial break occurs at a
market open. There are three market opens in the FX
market: the U.S. open, which occurs at approximately 8am
EDT, the European open, which occurs at 2am EDT, and
the Asian open which occurs at 7pm EDT
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PowerupCapital Pte Ltd
Copyright 2002-2010
PowerupCapital Pte Ltd
Figure 1 - This chart shows a common day
in the FX market. The price of a major
currency pair (GBP/USD) tends to fluctuate
between the support and resistance levels
identified by the pivot point calculation.
The areas circled in the chart are good
illustrations of the importance of a break
above these levels.
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PowerupCapital Pte Ltd
Copyright 2002-2010
PowerupCapital Pte Ltd
Copyright 2002-2010
PowerupCapital Pte Ltd
Conclusion
Traders and market makers have been using pivot
points for years to determine critical support and/
or resistance levels. As the charts above have
shown, pivots can be especially popular in the FX
market since many currency pairs do tend to
fluctuate between these levels. Range-bound
traders will enter a buy order near identified levels
of support and a sell order when the asset nears the
upper resistance. Pivot points also enable trend
and breakout traders to spot key levels that need to
be broken for a move to qualify as a breakout.
Furthermore, these technical indicators can be
very useful at market opens.
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PowerupCapital Pte Ltd
Copyright 2002-2010
PowerupCapital Pte Ltd
Having an awareness of where these potential
turning points are located is an excellent
way for individual investors to become
more attuned to market movements and
make more educated transaction decisions.
Given their ease of calculation, pivot points
can also be incorporated into many trading
strategies. The flexibility and relative
simplicity of pivot points definitely make
them a useful addition to your trading
toolbox.
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PowerupCapital Pte Ltd
