Using Pivots To Help Identify Reaction Levels In The Forex
When I teach people to trade the forex markets, one of the tools that I recommend that they use are pivot points. If you're unfamiliar with pivot points, in my opinion they would be a very good tool to learn about.
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There are different types of pivots and they all have their place. For example, there are daily pivots, weekly pivots, and monthly pivots. There are even yearly pivots. I'm going to confine this discussion to daily pivots, because they're the most commonly used by forex day traders.
Daily pivots are calculated using a 24 hour period of the previous day. The most common 24 hour periods used are from midnight to midnight GMT, midnight to midnight Eastern Time, or 5 PM to 5 PM Eastern Time. Which one of these 24 hour periods you use is not critical. They all work.
Pivots can be calculated automatically by most charting software and generally the software will generate a central pivot together with several pivots below the central pivot point (for expected support), and several pivots above the central pivot point (for expected resistance).
There are different ways to use pivots, depending on your style of trading, preferred entry method, and a variety of other factors. But let me give you an example of how they can benefit you. Let's assume that we've determined that we're in an uptrend. If we see that price is dropping intra-day, then the thinking should be "buy the dips in an uptrend". The question of course, is "where do we buy?" And pivots can be an excellent place to enter a long trade in a scenario like this.
Now, I don't use pivots as a stand-alone way to enter a trade. There are far more effective ways to buy or sell, and although using pivots can be a big help, they should just be one of the confirming tools. For example, where you have a pivot point matching up with other identifiable levels of support or resistance, you get a better chance of a successful outcome. Also, by having a thorough understanding of things like expected support/resistance levels, trend, time of day, important news announcement etc, you can greatly increase your odds of a winning trade.
I think one of the best reasons for using pivots is that they are not a lagging indicator, such as moving averages, MACD, stochastic and other trading tools. These indicators do have their place, but it's important to understand the limitations of them (as with all tools). Again, pivots are known in advance, just like support/resistance is known in advance (if you know what to look for).
So if you're not already using pivots, take a look at them for yourself and watch how price reacts around them. You'll be glad you did!
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