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 are a simple mathematical calculation that determines the next time periods range based on the previous time periods data. It includes the high, the low and the closing price.
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. Pivot= (High+Low+Close)/3. You can use a 4 hour chart to calculate the next pivot point. Just plug in the values of high, low 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.
Once you have calculated the pivot point, trade long as long as the price stays above and trade short as long as the price is below the pivot point. The thinking behind the pivot points is simple but powerful. 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.
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 should determine the entry and exit for each position using pivot points. You can also use them with other technical indicators. Pivot point analysis is a time tested, robust and a reliable currency market analysis tool.
Many new currency traders and even experienced traders ignore learning pivot points considering them complicated. Nothing is far from the truth. They are very easy to use. Learn how to determine the market sentiments in any timeframe you want to trade with pivot points. But always keep this in your mind; these points are only a guide, they should not be taken as the Holy Grail. Pivot points can help you filter out excess information and avoid analysis paralysis from information overload.
Related posts:
