You'll love this lesson. Using pivot points as a trading strategy has been around a long time and was originally used by floor traders. This is a fun and easy way for merchants floor to get an idea of where the market is heading during the day, with only a simple calculation.
The pivot point is the speed at which changes in market direction for the day. Using some simple arithmetic and the previous days high, low and close, a number of perspectives. These points can be critical support and resistance. Pivot levels level support and resistance calculated from what are collectively known as pivot levels.
Every day, the market must follow the fence open, high, low and to date (in some markets like forex are 24 hours but generally use 17 hours EST on open and closed). This information basically contains all the information needed to use pivot points.
The reason pivot points are so popular is that they are predictive rather than delay. It uses information from the previous day to calculate potential turning points for the day is going to trade (today).
Because many traders follow pivot points you will often find that the market reacts at these levels. It gives you the opportunity to negotiate.
If you prefer single axis shows the formula used is:
Resistance 3 = High + 2 * (Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = (High + Low + Close) / 3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2 * (High - Pivot) As you can see from the above formula, just by having the previous days high, low and close you eventually finish with 7 points, 3 resistance levels, 3 levels support and the pivot points real.
If the market opens above the pivot point, then through the day is long positions. If the market opens below the pivot point, then through the day is short for retailers.
The three pivot points are the most important R1, S1 and the actual pivot point.
The general idea behind the pivot point of negotiation to find a change or a break of R1 or S1. When the market reaches R2, R3 or S2, S3 the market already overbought or oversold and these levels should be used to leave the place of entry.
Ideally, the entire market opening above the pivot level and then slightly since then to R1 and R2. You go to a break of R1 with the aim of R2 and if the market is almost half is very strong in the R2 and R3 stations with the rest of his position.
Unfortunately life is not that simple and we must deal with each trading day the best way possible. I chose at random the day of the week and what follows are some ideas on how you can be traded that day with the pivot points.
On August 12, 04 Euro / Dollar (EUR / USD) as follows:
High - 1.2297
Low - 1.2213
Close - 1.2249
This gives us:
Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
A = 1.2209 support
Support 2 = 1.2169
Support 3 = 1.2125
A glance at the map below 5 minutes
The green line is the pivot point. The blue lines are resistance levels R1, R2 and R3. The red lines are support levels S1, S2 and S3.
There are many ways to trade today with the pivot points, but I will walk through some of them and explain why it is not good in certain situations and why some are bad.
Breakout Trade
In the early days we were at the pivot point, so our tendency is for short operations. Channel formed so you would be out of the channel, preferably downward. In this trade must sell entry order just below the bottom line of canal with a stop order just above the upper channel line and the goal of S1. The problem today is that, S1 was very close to the breakout level and there is enough meat in the trade (13 pips). This is a good entry technique for you. This does not correspond to these days, does not mean it does not come the next day.
Decrease in trade
This is one of my favorite game. The market through S1 and then deleted. A control input is placed below support, which in this case is the last low before the withdrawal. A stop is placed above the back (the most recent high - high) and the target set for S2. The problem once again, that day is that the target of S2 is closed, and the market did not support previous, which tells us that the market sentiment began to change.
Overcoming resistance
As the day progresses, the market began to return to S1 and formed a channel (congestion area). This is another good game to trade. An input command is placed just above the upper duct line, with stops just below the bottom line of the channel and the target will be the first pivot axis. If trade in more than one position, then cover with half of its market position is close to the pivot axis, tighten the market action from the top, then look at this level. As it happened, the market never stopped and the second goal became R1. Also be obtained easily and closes the rest position to this level.
Advanced
As I mentioned earlier, there are many ways to trade with pivot points. A more sophisticated method is the use of a cross of two moving averages as a confirmation of the break. You can even use a combination of indicators that will help you make the decision. Perhaps the crossing of two ways, but also MACD must be in buying mode. Waste time with some of your favorite indicators but remember that the signal is the rest of the confirmation of the level and the only indicator.
Even in models around pivot levels or failures but that's not the point of this lesson. I just want to introduce another possible way to negotiate.
Happy Trading!
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