Action Forex Pivots
Pivot Points in Forex: Mapping Your Time Frame
It helps to have a map and see where the price is relative to previous market action. This way we can see what the sentiment of traders and investors at any given time, also gives a general idea of where the market is headed during the day. This information can help us decide which way to negotiate.
Pivot points, a technique developed by floor traders, help us see if the price is on action the upstream market.
As a definition, a pivot point is a turning point or condition. The same applies to the currency market, the pivot is a level that the sentiment of market changes from "bull" to "bear" or vice versa. If the market breaks this level up, then the feeling is said to is a bull market and is likely to go his way, on the contrary, if the market breaks this level down, then the sentiment is bear, and is expected to continue its way below. Also on this level, the market is expected to have some kind of support or resistance, and if the price can not break the pivot point, a possible bounce from it is plausible.
Pivot points work best on highly liquid markets, such as the spot market, but also can be used in other markets as well.
Pivots
In short, pivot point is a level at which the sentiment of traders and investors changes from bull to bear or vice versa.
Why PP work?
They work just because many individuals traders and investors use and trust them, as well as bank and institutional traders. We know that every trader that the pivot point is an important measure of the strength and weakness of any market.
Calculating pivot points
There are several ways to get to the pivot point. The method we found that the most accurate results is calculated by taking the average of the high, low and closing a previous exercise period (or session).
Pivot Point (PP) = (high + low + close) / 3
Take for example the following EUR / USD information from the previous meeting:
Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458
The PP would
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439
What is this number tell us?
Simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. In both cases, this condition is likely to continue until the next session.
Since the Forex Market is a market 24 hours (no close or open from day to day) is a eternal battle on deciding at white time we should take the open, close, high and low of each session. From our point of view, the times that produce more accurate predictions are outdoors at 00:00 GMT and close at 23:59 GMT.
Besides the calculation PP, there is another kind of support and resistance levels are calculated taking the PP as a reference.
Support 1 (S1) = (PP * 2) – H
Resistance 1 (R1) = (PP * 2) – L
Support 2 (S2) = PP – (R1 – S1)
Resistance 2 (R2) = PP + (R1 – S1)
Where, H is the High the previous period and L is the lowest in the last period
Continuing with the example above, PP = 1.2439
S1 = (1.2439 * 2) – 1.2474 = 1.2404
R1 = (1.2439 * 2) – 1.2376 = 1.2502
R2 = 1.2439 + (1.2636 to 1.2537) = 1.2537
S2 = 1.2439 – (1.2636 to 1.2537) = 1.2537
These levels is supposed to mark support and resistance levels for the current session.
In the example above, the PP has been calculated using information from the previous session (Previous day). In this way we could see possible intraday resistance and support levels. It can also be calculated using weekly or monthly data prior to determine these levels. Thus we can see the sentiment over longer periods of time. We can also see possible levels that can provide support and resistance throughout the week or month. Calculation of the pivot point on a weekly or monthly basis is mostly used by long-term traders, but can also be used by merchants quickly and gives us a good idea on the long-term trend.
S1, S2, R1 and R2 …? An alternative objective
As indicated above, the pivot Point area is a well known technique and it works simply because many traders and investors use and trust it. But what about the other support areas and resistance (S1, S2, R1 and R2), provide a level of support or resistance to a mathematical formula is somehow subjective. It's hard to just blindly trust them because the formula skipped that level. For this reason, they have created an alternative way to map our time frame, simpler but more objective and effective.
We calculate the pivot point as showed before. But our support and resistance levels are drawn in a different way. We take the previous session high and low, and draw those levels on the chart today. The same is done with the session before the previous session. Therefore, we will have our PP and four major levels made in our letter.
LOPS1 low the previous session.
HOPS1 high at the previous meeting.
LOPS2 low of the session before previous session.
HOPS2 high of the session before the previous session.
PP, pivot point.
These levels will tell us the market forces at any given time. If the market is trading above the PP, then the market is considered in a possible uptrend. If the market is trading above or HOPS1 HOPS2, then the market is in an uptrend, and only take long positions. If the market is trading below the PP then the market is considered in a downtrend possible. If the market is trading below or LOPS2 LOPS1, then the market is in a downtrend, and we must think only of short transactions.
The psychology behind this approach is simple. We know that for some reason did not stop the market going higher / lower the previous session, or the session before. We do not know why, and do not need to know. We only know the fact: the market reversed at that level. We also know that traders and investors have memories that remind you that the price stopped there before, and it is likely that the market reverses from there again (perhaps for the same reason, and such may not) or at least find some support or resistance at these levels.
What is important about his approach is that support and resistance levels are measured objectively, not just a level derived from a mathematical formula, the price of investing there before so these levels are more likely to be effective.
Our mapping method works on both market conditions, when trending and sideways conditions. In a trending market, helps us determine the strength of trend and trade are significant. In sideways markets shows the potential levels of investment.
How do we use our mapping method?
We at StraightForex (www.straightforex.com) use the allocation method in three different ways: as a trend identification (measure the strength of the trend), a trade system with significant levels with price behavior as a signal to trade, and establish the risk reward (RR) of the same trade in the market place is in relation to the previous session.
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