Today I’m going to talk about how you can use pivot points in trading and how you can become a more profitable trader using target trading as part of your analysis. You have probably noticed that I always use target trading in my analysis articles.
What are pivot points in trading?
Pivot Points in forex is an indicator that was developed by floor traders in the commodity markets to find potential turning points. Forex pivots determine the level which the sentiment of the market could change from bearish to bullish. As currency traders we see these as support and resistance. These Pivot points or Targets can be either calculated yourself, or can be supplied by any retail forex broker or third party chart provider and usually free of charge.
Pivot Points offer chartists a methodology to determine price direction and then set support and resistance levels. Price direction is determined by looking at the current period’s price action relative to the pivot point: starting above or below the pivot point, or crossing it in either direction during trading. The set support and resistance points come into play after price direction has been determined.
Traders use these pivot points or targets to find their entry, stops and profit taking. Target trading is not meant to be traded alone. You must apply your knowledge of Fibonacci, Trend Lines and Relative Strength Index. It is not meant to allow a trader to look at a potential target and blindly put in a trade waiting for the currency pair to hit the target and give them a profit. It is a tool like anything else. For some it is highly successful, for others … not so much. You have to find your comfort level with Targets.
I use them as a guide. To look for general direction and trend. There are three-time frames that are usually looked at- the 4 hour (Monthly), the 1 hour (Daily), the 10 min (1 Hour).
The pivot point is the basis for the indicator, but it also includes other support and resistance levels that are projected based on the pivot point calculation. All these levels help traders see where the price could experience support or resistance. Similarly, if the price moves through these levels it lets the trader know the price is trending in that direction.
Real examples of how to use pivot points in trading?
GBP CAD 4 Hour (Monthly) Chart:
Targets that have already been “hit” are no longer considered as potential targets. See target at 1.72355. It was just hit and the GBP CAD is now headed down to the next target at 1.67754 which is 295 pips further down from it’s current position. The Relative Strength Index (RSI) also show it heading from the sell zone to the buy zone and this is duplicated by the Chande Momentum Oscillator (CMO). The monthly chart can take a month -- 1 1/2 months to reach target depending on volatility and market conditions.
GBP CAD 1 Hour (Weekly) Chart:
Here the GBP CAD is about to hit it’s target at 1.70190 which is 36 pips down from it’s current position. Both the RSI and CMO are in the buy position at present. Further up, however, is an old target at 1.75356 which this pair might bounce up to or a new target may form, not yet visible. Old targets are not to be taken too seriously. The older the target the less likely the currency will go to it.
GBP CAD 10 minute (1 hour) Chart:
The GBP CAD has just narrowly missed hitting the target at 1.71741 and dipped down to hit an older target at 1.70581. The RSI and CMO is just above the buy zone indicating there is further downside to go with this pair before it turns to go back up to the target at 1.71741. Or a new target may form further down giving this pair momentum to drive down further before the RSI and CMO turn back up.
The simplest way to use pivot point levels in your forex trading is to use them just like your regular support and resistance levels.
Just like good ole support and resistance, price will test the levels repeatedly.
How I use pivot points in my daily trading -- my pivot points trading strategy
None of these should be taken on their own face and a trade just haphazardly put in. Here is my pivot points trading strategy:
This is a method where you put in your first trade at a very low lot size. As the currency goes toward target, you add trades on, again in low lot sizes. Throughout check your regular charts on this currency pair. Check your fibs, your trend lines and the RSI on those charts. The currency will take you on a roller coaster ride of up and down as it winds it’s way toward the target you have found, and it may go past that target entirely which will require you to find the next target and again recheck all your charts, your fibs, your trend lines, your candlestick formations. Add on and compare with your favorite indicator, the ADX or the MacD etc.
When the price approaches a pivot point—especially for the first time in each direction—it will have a tendency to reverse. It is this reversal that is used by the pivot point bounce trading system.
How to find strong pivot points?
Don’t forget to take into consideration any fundamentals that come up in your trading week. This will impact your currency and govern your stops accordingly so that you are not prematurely stopped out. I love when I hear traders say, they set their trade and walk away. Well maybe they are better than I am, maybe they know more than me, however, I keep an eye on my trades and how close they are getting on my phone app. I don’t walk around the grocery store with my phone app on but I do check it every so often when I have a spare moment just to make sure I am not taken by surprise with a spike or fundamental that is going a lot further than what I anticipated so I can either adjust or decide to let it take it’s course.
In short, this is basic support and resistance trading. The more times a pivot level is touched then reverses the stronger the level is. Pivoting means reaching a support or resistance level and then reversing.
Pivot points have the advantage of being a leading indicator, meaning traders can use the indicator to gauge potential turning points in the market ahead of time. They can either act as trade entry targets themselves by using them as support or resistance, or as levels for stop-losses and/or take-profit levels.
How to use pivot points in trading?
The concept is very easy:
- If price is nearing the upper resistance level, you could SELL the pair and place a stop above the resistance.
- If price is nearing a support level, you could BUY and put your stop below the level.
It’s essential to have a good strategy for your stop loss as much as to have an entry strategy.
If the price breaks above the central pivot point then the sentiment has shifted on the bullish side and it’s wise to get out of any short trades. However, in order to accommodate any false breakouts, we also use a buffer of about 5-10 pips above the central pivot point for our SL.
Check out this video
“Pivot Points Explained for Day and Swing Trading” by David Moadel.
Pivot points in trading -- conclusion
I hope this article was helpful and you now understand why I’m always looking at pivot points in trading. It is indeed one of the most helpful indicators out there. Hopefully, you also will consider to make a new routine and include pivot points and target trading in your daily analysis.
No matter how much research we do about the most popular indicators, we need to focus on some fundamentals, like a powerful Forex strategy that actually works. You should check out our article where we have studied successful Forex strategies that work right now.
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