Traders have since time immemorial been using price charts to help them navigate through the labyrinth of price movements to determine when the most opportune time to enter the market is. All through these times they have embraced the chart as their bible and the concept of Supports and Resistances as their directional compass. They believed that supports and resistances are psychological price levels that tend to reassert their influence over and over again on current price action.
Because they believe that the most important element in their trading strategy is timing, they went out of their way to find ways to use supports and resistances to time their trade albeit determine their entry and exit points. To put it simply, they wanted to develop a method to help them determine when they should buy and sell. They know that trading foreign currencies requires a more in-depth analysis of the market in order to arrive at certain price action points where their buy and sell orders can be executed. The use of support and resistance lines provided them the solution they have been seeking for.
Since the concept of supports and resistance lines evolved into a trading tool, most forex traders, if not all have, used them as their navigational anchor to determine their trades. The concept was simple enough to follow. They would buy at or anywhere near the price support levels; and, they would sell at or around the resistance lines. To them, support lines represent the price levels where sellers become uncomfortable with their selling positions and start to unload. Conversely, resistance lines represent the price levels where buyers exit their positions.
These lines do not in any way determine the rates of exchange between currencies. However, because the number of traders who use them to trade is so overwhelming, the sheer number of buy and sell orders resulting from the use of support and resistance lines tended to exert an influence on actual price movements. And, as years went on some traders even devised different methodologies to determine various supports and resistances. They now use mathematical models and currency calculators to determine supports and resistances. This is a far cry from the crude and controversial method of simply connecting tops and bottoms. These mathematical models treat supports and resistances as pivot points and are mathematically derived using different formulas and the highs and the lows of previous trading sessions as references. This method of determining supports and resistances have since been known as pivot point calculators.
From the first classic pivot point calculator, there are now four other pivot point calculators that have cropped up. It is now a long list that includes the Fibonacci Pivot Point Calculator, the Camarilla Pivot Point Calculator, Tom DeMark’s pivot point Calculator, and Woodie’s Pivot Point Calculator. Each one of these currency calculator uses a different formula and incorporates a different theory.
While we will always argue that supports and resistances, whatever method may have been used to determine them do not actually determine or set the rates of exchange between currencies, they have become a vital tool to forex traders for one simple reason which we already mentioned above. Because a significant number of traders use these different methods a lot, buy and sell orders tend to significantly accumulate at these points.
As such, pivot points became effective short term indicators used to great advantage by intraday traders. They have become the most important currency calculator used by forex traders.