Using pivot points in currency trading is popular among many forex traders. Pivot points are calculated based on the previous movements in the market and trades are made once the market reaches a resistance or support line of the pivot point. The resistance and support lines are set up first thing in the day trading, then traders will wait for the market to reach the entry points.
Even before the rise of electronic trading, pivot points are used by forex traders in the pits to identify concealed resistance and support levels. The pivot points are still used by veteran technical analysts and floor traders. The primary advantage now is that we can use computers to easily compute the pivot points. Most forex software can easily calculate them instantly, therefore improving the use of pivot points.
Take note that the market could only go sideways, down, or up. It is similar to an elastic band, which has been stretched, but will later rebound to its equilibrium point where the market achieves balance, and then will be stretched to the opposing side only to rebound again and hit another equilibrium point. Fundamental events could also push the market in a new direction. Pivot could help you in determining how far that elastic band could stretch before it rebounds.
Even though there are several time frames, which can be used to compute pivot points, we will use a daily time frame for the sake of discussion. Pivot points are computed using the previous days, high, low, close, and open figures. There are available pivot point calculators available online so you don’t have to spend time to do the computations manually. Also take note that the longer the duration that you are using, the longer you should be prepared to observe the market or wait for the next entry point.
Unlike other indicators, pivot points are objective tools. Because they are calculated, there can only be a fixed figure for a certain time frame. Subjective tools like Elliot waves and Fibonacci retracements, may have different people trading in different points at the same time because they are subject for individual interpretation.
The Pivot Points could help you project the highs and lows for the next day, and they could provide you anything from four to eight support and resistance levels. But still, you need to determine the trend in order to become a successful pivot point trader.
Pivot Points could also provide you accurate exit and entry points instead of gaining entry into the markets that are in the middle of movement or about to rebound to the equilibrium point. In this case, you need to use other indicators to help you on the exit and entry.
Content credits: http://www.investopedia.com/terms/p/pivotpoint.asp , http://www.mtrading.eg/education/
