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Understand Pivot Points
Written by Ahmad Hassam   
Monday, 03 August 2009 15:00
The power of pivot points is based on the fact that they work in all markets that have established ranges. Pivot points are leading indicators unlike most of the other indicators that are lagging.
by AhmadHassam


The power of pivot points is based on the fact that they work in all markets that have established ranges. Pivot points are leading indicators unlike most of the other indicators that are lagging.

Pivot points tell you about the future price action. They are calculated based on a simple mathematical formula that determines the next time periods range based on the previous time periods data. It includes the low, the high and the closing price for that trading session.

If you dont know what is a range, then a range is the high and low of a given time period. Markets are just people buying and selling. The high represent the buyers exuberant bullishness. The low represents the sellers pessimistic bearishness for that particular trading session.

A pivot point is that special line drawn in sand where most traders turn from being bearish to bullish or bullish to bearish. These points are used in currency trading to tell if the market sentiment has shifted from being positive/long to negative/short. If the price is trading above the point, you should take a long position. And if the price is trading below the pivot point, you should take a short position.

Now lets calculate the pivot point for one trading session. Pivot= (Low+High+Close)/3. You can use a 4 hr chart to calculate the pivot point for the next session. Just plug in the values of low, high and close for the 4 hour session to calculate the next pivot point. Thus you can have 2 pivot points for each 8 hour session and 6 pivot points for the 24 hour session.

Take a long position as long as the price stays above the pivot point and trade a short position as long as the price is below the pivot point. The thinking behind the pivot points is simple yet powerful and highly useful. If the buyers are willing to pay more for a currency pair now than they were 4 hours ago, than at least for the time being the markets are bullish. Conversely, if the buyers are not interested in buying for the time being than for the time being the market will stay bearish.

Pivot point works as a filter for you in telling you about the mood of the majority investors at that point. You should only buy if the price action is above the pivot point. And you should only sell if the price action is below. We have used the example of 4 hour charts but you can also use daily, weekly and monthly charts to calculate these points for those sessions.

You can determine the entry and exit for each position using pivot points. You can also use them in conjunction with other technical indicators. Pivot point analysis is a time tested, robust and a reliable market analysis tool.

Many new currency traders ignore learning pivot points considering them complicated. Its a myth. They are very easy to use. Learn how to use them to determine the market sentiments in any timeframe you want to trade. But always keep this in your mind; it is only a guide. These numbers should not be taken as the Holy Grail. They can help you filter out excess information and avoid analysis paralysis from information overload.

Information:

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading and swing trading stocks and currencies. Trade Dow Futures. Learn Forex Trading.
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