The Pivot calculator produces a series of supports and resistances that can be used by traders to set their price action points. These points serve as the basis on which traders determine their entry and exit (target) points as well as help them set their trading stops. Trading the currency market using pivot points follows one simple principle – if the price opens above the pivot in the next session, the price is likely to continue going up and therefore you must prefer taking long positions. If the price opens below the pivot in the next session, then the price is likely to keep going down in which case you should prefer going short.
Pivot points are short term trend indicators and valid only for the duration of a particular trading session. The indicated price direction and the calculated resistance and support points produced by a pivot calculator can drastically and abruptly change in the succeeding trading session. Aside from this, pivot points are known to indicate short term intermediate trends only which may be against the underlying major trend of the currency pair in focus. Such short term trends open the trader to the possibility of getting ‘whipsawed’ as prices abruptly resume their major trend. This is basically the reason why we say pivot points are more useful to day traders than to intraday traders.
For intraday traders a session means one day or a 24 hour trading session that typically begins at the opening of the Australian financial markets and ends at the closing in New York. For day traders a session can be anywhere from 4 hours, 1 hour, or half hour depending on what time frame they prefer to use. Intraday traders are basically position traders who take advantage of midterm to long term trends. They tend to hold on to their position for days in the hope of maximizing profits. Day traders on the other hand take advantage of smaller price movements playing the market in either direction taking advantage of every trading opportunity as the currencies establish their trading ranges for the day and settling for small profits in the process.
Pivot calculators are more ideal to day traders since they are able to capture short term trends. However, to avoid getting whipsawed, they must be used with extreme care and with a strict money management strategy in place.
Here are just some of the more useful tips you can use when day trading forex using pivot points.
- Go short if the next session opens below the pivot and long if it opens above the pivot but whether you go long or short try to establish a position as close to the pivot as possible.
- Put a tight trading stop slightly above the pivot if you are short or slightly below it if you are long. Turn your stop into a trailing stop when the price starts turning in your favor to protect your profit adjusting it as often as necessary.
- You may opt to put in place a slightly loose stop if you are trading in the direction of the major trend but make it tighter if you are trading against it.
- Remember that resistances turn into support when they are breached and similarly supports turn into resistances if they too are breached so you must learn to be sensitive to them and make the necessary adjustments immediately since changes in the pivot calculator output will only be reflected in the next session.
- Always try to temper your trading decisions culled from pivot points by referring to other technical indicators such as the candlestick charts of the same timeframe and the corresponding volume studies.