 |
Pivot Points in Forex: Mapping your Time Frame
by Raul Lopez
www.straightforex.com
It is useful to have a map and be able to see where the
price is relative to previous market action. This way we
can see how is the sentiment of traders and investors at
any given moment, it also gives us a general idea of where
the market is heading during the day. This information can
help us decide which way to trade.
Pivot points, a technique developed by floor traders, help
us see where the price is relative to previous market
action.
As a definition, a pivot point is a turning point or
condition. The same applies to the Forex market, the pivot
point is a level in which the sentiment of the market
changes from "bull" to "bear" or vice versa. If the market
breaks this level up, then the sentiment is said to be a
bull market and it is likely to continue its way up, on
the other hand, if the market breaks this level down, then
the sentiment is bear, and it is expected to continue its
way down. Also at this level, the market is expected to
have some kind of support/resistance, and if price can't
break the pivot point, a possible bounce from it is
plausible.
Pivot points work best on highly liquid markets, like the
spot currency market, but they can also be used in other
markets as well.
Pivot Points
In a few words, pivot point is a level in which the
sentiment of traders and investors changes from bull to
bear or vice versa.
Why PP work?
They work simply because many individual traders and
investors use and trust them, as well as bank and
institutional traders. It is known to every trader that
the pivot point is an important measure of strength and
weakness of any market.
Calculating pivot points
There are several ways to arrive to the Pivot point. The
method we found to have the most accurate results is
calculated by taking the average of the high, low and
close of a previous period (or session).
Pivot point (PP) = (High + Low + Close) / 3
Take for instance the following EUR/USD information from
the previous session:
Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458
The PP would be,
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439
What does this number tell us?
It simply tells us that if the market is trading above
1.2439, Bulls are winning the battle pushing the prices
higher. And if the market is trading below this 1.2439 the
bears are winning the battle pulling prices lower. On both
cases this condition is likely to sustain until the next
session.
Since the Forex market is a 24hr market (no close or open
from day to day) there is a eternal battle on deciding at
white time we should take the open, close, high and low
from each session. From our point of view, the times that
produce more accurate predictions is taking the open at
00:00 GMT and the close at 23:59 GMT.
Besides the calculation of the PP, there are other support
and resistance levels that are calculated taking the PP as
a reference.
Support 1 (S1) = (PP * 2) ~ H
Resistance 1 (R1) = (PP * 2) - L
Support 2 (S2) = PP ~ (R1 ~ S1)
Resistance 2 (R2) = PP + (R1 ~ S1)
Where~, H is the High of the previous period and L is
the low of the previous period
Continuing with the example above, PP = 1.2439
S1 = (1.2439 * 2) - 1.2474 = 1.2404
R1 = (1.2439 * 2) ~ 1.2376 = 1.2502
R2 = 1.2439 + (1.2636 ~ 1.2537) = 1.2537
S2 = 1.2439 ~ (1.2636 ~ 1.2537) = 1.2537
These levels are supposed to mark support and resistance
levels for the current session.
On the example above, the PP was calculated using
information of the previous session (previous day.) This
way we could see possible intraday resistance and support
levels. But it can also be calculated using the previous
weekly or monthly data to determine such levels. By doing
so we are able to see the sentiment over longer periods of
time. Also we can see possible levels that might offer
support and resistance throughout the week or month.
Calculating the Pivot point in a weekly or monthly basis
is mostly used by long term traders, but it can also be
used by short time traders, it gives us a good idea about
the longer term trend.
S1, S2, R1 AND R2...? An Objective Alternative
As already stated, the pivot point zone is a well-known
technique and it works simply because many traders and
investors use and trust it. But what about the other
support and resistance zones (S1, S2, R1 and R2,) to
forecast a support or resistance level with some
mathematical formula is somehow subjective. It is hard to
rely on them blindly just because the formula popped out
that level. For this reason, we have created an
alternative way to map our time frame, simpler but more
objective and effective.
We calculate the pivot point as showed before. But our
support and resistance levels are drawn in a different
way. We take the previous session high and low, and draw
those levels on today's chart. The same is done with the
session before the previous session. So, we will have our
PP and four more important levels drawn in our chart.
LOPS1, low of the previous session.
HOPS1, high of the previous session.
LOPS2, low of the session before the previous session.
HOPS2, high of the session before the previous session.
PP, pivot point.
These levels will tell us the strength of the market at
any given moment. If the market is trading above the PP,
then the market is considered in a possible uptrend. If
the market is trading above HOPS1 or HOPS2, then the
market is in an uptrend, and we only take long positions.
If the market is trading below the PP then the market is
considered in a possible downtrend. If the market is
trading below LOPS1 or LOPS2, then the market is in a
downtrend, and we should only consider short trades.
The psychology behind this approach is simple. We know
that for some reason the market stopped there from going
higher/lower the previous session, or the session before
that. We don't know the reason, and we don't need to know
it. We only know the fact: the market reversed at that
level. We also know that traders and investors have
memories, they do remember that the price stopped there
before, and the odds are that the market reverses from
there again (maybe because the same reason, and maybe not)
or at least find some support or resistance at these
levels.
What is important about his approach is that support and
resistance levels are measured objectively; they aren't
just a level derived from a mathematical formula, the
price reversed there before so these levels have a higher
probability of being effective.
Our mapping method works on both market conditions, when
trending and on sideways conditions. In a trending market,
it helps us determine the strength of the trend and trade
off important levels. On sideways markets it shows us
possible reversal levels.
How we use our mapping method?
We at StraightForex (www.straightforex.com) use the
mapping method in three different ways: as a trend
identification (measure of the strength of the trend), a
trading system using important levels with price behavior
as a trading signal and to set the risk reward ratio (RR)
of any given trade based on where the is the market
relative to the previous session.
Submit An Article
|
|  |
