One of the most important elements of a successful forex trading strategy is timing. Essentially, this is about determining when to enter and exit a trade. To put it simply, timing is about determining at what price levels you should buy and sell. Unlike gambling where you use your gut feel most of the time to place a bet, trading foreign currencies requires a more in-depth analysis of the market in order to arrive at certain price action points where buy and sell orders can be executed. The objective is to be able to come up with high probability trades or trades that are more likely to generate profits.
For so many years now, traders have been using price charts to help them navigate through the maze of up and down swings of prices to determine when the most opportune time to enter the market is. Through these years the concept of Supports and Resistances evolved. They believed that supports and resistances are psychological price levels that tend to reassert their influence over and over again on current price action.
Supports and resistances have since become the navigational anchor of most traders. They tend to buy at or anywhere near the price support levels; and, they tend to 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.
While it is a fact that these lines do not in any way determine the rates of exchange between currencies, the sheer number of traders using and respecting them as their price action points have proven to exert an influence on price movements. And, through the years people have devised different methodologies to determine supports and resistances.
From the simple and controversial method of connecting tops and bottoms, supports and resistances can now be determined using mathematical models. These mathematical models consider 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. They have since become known as pivot point calculators.
Apart from the original, classic pivot point calculator there are four other pivot point calculators that have been devised namely 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 pivot point calculator uses a different formula and incorporates a different theory.
While they are never real price-determining factors, they exert an influence on price movements because a significant number of traders use them as reference points to exit and enter their trades. As a result, orders tend to cluster at these points and therefore it is but logical to pay attention to them.
Pivot points are short term indicators that can be used effectively by intraday traders. There are used mainly by forex traders to time their trades, i.e. determine their entry and exit points. Used with other indicators, pivot point calculators can be an important trading tool to help you pick high probability trades effectively and easily.