You are on page 1of 23

Pivot Points in Forex

Wednesday, June 28, 2006 10:00 AM GMT by Raul Lopez

Mapping Your Time Frame

It is useful to have a map and be able to see where the price is relative to previous market action. This way we can see how is the sentiment of traders and investors at any given moment, it also gives us a general idea of where the market is heading during the day. This information can help us decide which way to trade. Pivot points, a technique developed by floor traders, help us see where the price is relative to previous market action. As a definition, a pivot point is a turning point or condition. The same applies to the Forex market, the pivot point is a level in which the sentiment of the market changes from bull to bear or vice versa. If the market breaks this level up, then the sentiment is said to be a bull market and it is likely to continue its way up, on the other hand, if the market breaks this level down, then the sentiment is bear, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price cant break the pivot point, a possible bounce from it is plausible. Pivot points work best on highly liquid markets, like the spot currency market, but they can also be used in other markets as well.

Pivot Points
In a few words, pivot point is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.

Why PP work?
They work simply because many individual traders and investors use and trust them, as well as bank and institutional traders. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.

Calculating pivot points

There are several ways to arrive to the Pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session). Pivot point (PP) = (High + Low + Close) / 3 Take for instance the following EUR/USD information from the previous session: Open: 1.2386

High: 1.2474 Low: 1.2376 Close: 1.2458 The PP would be, PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439 What does this number tell us? It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. On both cases this condition is likely to sustain until the next session. Since the Forex market is a 24hr market (no close or open from day to day) there is a eternal battle on deciding at white time we should take the open, close, high and low from each session. From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT. Besides the calculation of the PP, there are other support and resistance levels that 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 of the previous period and L is the low of the previous 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 1.2537) = 1.2537 S2 = 1.2439 (1.2636 1.2537) = 1.2537 These levels are supposed to mark support and resistance levels for the current session. On the example above, the PP was calculated using information of the previous session (previous day.) This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point in a weekly or monthly basis is mostly used by long term traders, but it can also be used by short time traders, it gives us a good idea about the longer term trend.

S1, S2, R1 AND R2...? An Objective Alternative

As already stated, the pivot point zone is a well-known technique and it works simply because many traders and investors use and trust it. But what about the other support and resistance

zones (S1, S2, R1 and R2,) to forecast a support or resistance level with some mathematical formula is somehow subjective. It is hard to rely on them blindly just because the formula popped out that level. For this reason, we 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 todays chart. The same is done with the session before the previous session. So, we will have our PP and four more important levels drawn in our chart. LOPS1, low of the previous session. HOPS1, high of the previous session. LOPS2, low of the session before the previous session. HOPS2, high of the session before the previous session. PP, pivot point. These levels will tell us the strength of the market at any given moment. If the market is trading above the PP, then the market is considered in a possible uptrend. If the market is trading above HOPS1 or HOPS2, then the market is in an uptrend, and we only take long positions. If the market is trading below the PP then the market is considered in a possible downtrend. If the market is trading below LOPS1 or LOPS2, then the market is in a downtrend, and we should only consider short trades. The psychology behind this approach is simple. We know that for some reason the market stopped there from going higher/lower the previous session, or the session before that. We dont know the reason, and we dont need to know it. We only know the fact: the market reversed at that level. We also know that traders and investors have memories, they do remember that the price stopped there before, and the odds are that the market reverses from there again (maybe because the same reason, and maybe 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; they arent just a level derived from a mathematical formula, the price reversed there before so these levels have a higher probability of being effective. Our mapping method works on both market conditions, when trending and on sideways conditions. In a trending market, it helps us determine the strength of the trend and combined with price behavior helps us trade off important levels. On sideways markets it shows us possible reversal levels. It also helps us to set the Risk Reward ratio based on where is the market relative to previous market action. Published on Mon, 02 Oct 2006 09:34:52 GMT Pivot Strategies: A Handy Tool <a August 24, 2005 | By Kathy Lien, Chief Strategist, href=" FXCM (Download her new e-book) T=Forex_tower"><img src=" Forex_tower" height="600" Email this Print this width="120" border="0" Comments Article Article align="center"></a>

For many years, traders and market makers have used pivot points to determine critical support and/or resistance levels. Pivots are also very popular in the forex market and can be an extremely useful tool for range-bound traders to identify points of entry and for trend traders and breakout traders to spot the key levels that need to be broken for a move to qualify as a breakout. In this article, we'll explain how pivot points are calculated, how they can be applied to the FX market, and how they can be combined with other indicators to develop other trading strategies.

<ILAYER SRC="" HEIGHT="250" WIDTH="300"> </ILAYER> <NOLAYER> <A HREF=""><IMG SRC="" HEIGHT="250" WIDTH="300"></A> </NOLAYER> Calculating Pivot Points By definition, a pivot point is a point of rotation. The prices used to calculate the pivot point are the previous period's high, low and closing prices for a security. These prices are usually taken from a stock's daily charts, but the pivot point can also be calculated using information from hourly charts. Most traders prefer to take the pivots, as well as the support and resistance levels, off of the daily charts and then apply those to the intraday charts (for example, hourly, every 30 minutes or every 15 minutes). If a pivot point is calculated using price information from a shorter time frame, this tends to reduce its accuracy and significance. The textbook calculation for a pivot point is as follows: Central Pivot Point (P) = (High + Low + Close) / 3

Support and resistance levels are then calculated off of this pivot point using the following formulas: First level support and resistance: First Resistance (R1) = (2*P) - Low First Support (S1) = (2*P) - High Likewise, the second level of support and resistance is calculated as follows: Second Resistance (R2) = P + (R1-S1) Second Support (S2) = P - (R1- S1) Calculating two support and resistance levels is common practice, but it's not unusual to derive a third support and resistance level as well. (However, third-level support and resistances are a bit too esoteric to be useful for the purposes of trading strategies.) It's also possible to delve deeper into pivot point analysis - for example, some traders go beyond the traditional support and resistance levels and also track the mid-point between each of those levels. Applying Pivot Points to the FX Market Generally speaking, the pivot point is seen as the primary support or resistance level. The following chart is a 30-minute chart of the currency pair GBP/USD with pivot levels calculated using the daily high, low and close prices. The green line is the pivot point (P). The red lines are resistance levels (R). The blue lines are support levels (S). The yellow lines are mid-points (M). Figure 1 shows how the pivot line served as support for the GBP/USD for most of the European trading hours. Once U.S. traders joined the market,

however, prices began to break higher, with each of the breaks first testing and resisting either the midpoint or the R1 and R2 levels; then the break occurred off of those levels (see areas circled). This chart also shows something that occurs frequently in the FX market, which is that the initial break occurs at a market open. There are three market opens in the FX market: the U.S. open, which occurs at approximately 8am EDT, the European open, which occurs at 2am EDT, and the Asian open which occurs at 7pm EDT.

Figure 1 - This chart shows a common day in the FX market. The price of a major currency pair (GBP/USD) tends to fluctuate between the support and resistance levels identified by the pivot point calculation. The areas circled in the chart are good illustrations of the importance of a break above these levels.

What we also see when trading pivots in the FX

market is that the trading range for the session usually occurs between the pivot point and the first support and resistance levels because a multitude of traders play this range. Take a look at Figure 2, a chart of the currency pair USD/JPY. As you can see in the areas circled, prices initially stayed within the pivot point and the first resistance level with the pivot acting as support. Once the pivot was broken, prices moved lower and stayed predominately within the pivot and the first support zone.

Figure 2 - This chart shows an example of the strength of the support and resistance calculated using the pivot calculations.

The Significance of Market Opens One of the key points to understand when trading pivot points in the FX market is that breaks tend to occur around one of the market opens. The reason for this is the immediate influx of traders entering the market at the same time. These traders go into the office, take a look at how prices traded overnight

and what data was released and then adjust their portfolios accordingly. During the quieter time periods, such as between the U.S. close (4pm EDT) and the Asian open (7pm EDT) (and sometimes even throughout the Asian session, which is the quietest trading session), prices may remain confined for hours between the pivot level and either the support or resistance level. This provides the perfect environment for range-bound traders. Two Strategies Using Pivot Points Many strategies can be developed using the pivot level as a base, but the accuracy of using pivot lines increases when Japanese candlestick formations can also be identified. For example, if prices traded below the central pivot (P) for most of the session and then made a foray above the pivot while simultaneously creating a reversal formation (such as a shooting star, doji or hanging man), you could sell short in anticipation of the price resuming trading back below the pivot point. A perfect example of this is shown in Figure 3, a 30minute USD/CHF chart. USD/CHF had remained range-bound between the first support zone and the pivot level for most of the Asian trading session. When Europe joined the market, traders began taking USD/CHF higher to break above the central pivot. Bulls lost control as the second candle became a doji formation. Prices then began to reverse back below the central pivot to spend the next six hours between the central pivot and the first support zone. Traders watching for this formation could have sold USD/CHF in the candle right after the doji formation to take advantage of at least 80 pips worth of profit between the pivot point and the first level of support.

Figure 3 - This chart shows a pivot point being used in cooperation with a candlestick pattern to predict a trend reversal. Notice how the descent was stopped by the second support level.

Another strategy traders can use is to look for prices to obey the pivot level, therefore validating the level as a solid support or resistance zone. In this type of strategy, you're looking to see the price break the pivot level, reverse and then trend back towards the pivot level. If the price proceeds to drive through the pivot point, this is an indication that the pivot level is not very strong and is therefore less useful as a trading signal. However, if prices hesitate around that level or "validate" it, then the pivot level is much more significant and suggests that the move lower is an actual break, which indicates that there may be a continuation move.

FREE Report: 7 Things Every Investor Must Know! The Investopedia Advisor analyst team wants to share with you 7 time tested tenets that they use to uncover market stomping stock ideas. This is a must-read report for anyone serious about controlling their financial destiny. Click here to access your FREE report online right now!

The 15-minute GBP/CHF chart in Figure 4 shows an example of prices "obeying" the pivot line. For the most part, prices were first confined within the midpoint and pivot level. At the European open (2am EDT), GBP/CHF rallied and broke above the pivot level. Prices then retraced back to pivot level, held it and proceeded to rally once again. The level was tested once more right before the U.S. market open (7am EDT), at which point traders should have placed a buy order for GBP/CHF since the pivot level had already proved to be a significant support level. For those traders who did do that, GBP/CHF bounced off the level and rallied once again.

Figure 4 - This is an example of a currency pair

"obeying" the support and resistance identified by the pivot point calculation. These levels become more significant the more times the pair tries to break through.

Conclusion Traders and market makers have been using pivot points for years to determine critical support and/or resistance levels. As the charts above have shown, pivots can be especially popular in the FX market since many currency pairs do tend to fluctuate between these levels. Range-bound traders will enter a buy order near identified levels of support and a sell order when the asset nears the upper resistance. Pivot points also enable trend and breakout traders to spot key levels that need to be broken for a move to qualify as a breakout. Furthermore, these technical indicators can be very useful at market opens. Having an awareness of where these potential turning points are located is an excellent way for individual investors to become more attuned to market movements and make more educated transaction decisions. Given their ease of calculation, pivot points can also be incorporated into many trading strategies. The flexibility and relative simplicity of pivot points definitely make them a useful addition to your trading toolbox. By Kathy Lien, Chief Strategist, FXCM (Download her new e-book) Kathy Lien is Chief Strategist at the world's largest retail forex market maker, Forex Capital Markets in New York. Her book "Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Swings" (2005, Wiley), written for both the novice and expert, has won much acclaim. Easy to read and easy to apply, this book shows traders how to enter the currency market with confidence - and create long-term success! Kathy has taught currency trading seminars across the U.S. and has also written for CBS MarketWatch, Active Trader, Futures and SFO magazines.

Email this

Print this



Add to


Article Other RSS Readers


Free Traders Resource CD

- Make the most of today's opportunities and sign up for this complete trading course you can access on your own computer. You'll learn everything from the basics of the market through analysis, trading strategies and order execution, yours free!

Term Directory: # | A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W|X|Y|Z

Trade Futures? Name Your Commission! How to Play Poker Technical Analysis Follow Warren Buffett Site Stuff: Advertising Tell-A-Friend Contact Us Link To Us Terms of Use Privacy Policy J

Pivot Point Trading You are going to love this lesson. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations. The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels. Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to use pivot points. The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day). Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade. Before I go into how you calculate pivot points, I just want to point out that I have put an online calculator and a really neat desktop version that you can download for free HERE If you would rather work the pivot points out by yourself, the formula I use is below:

Resistance 3 = High + 2*(Pivot - Low) Resistance 2 = Pivot + (R1 - S1) Resistance 1 = 2 * Pivot - Low Pivot Point = ( High + Close + Low )/3 Support 1 = 2 * Pivot - High Support 2 = Pivot - (R1 - S1) Support 3 = Low - 2*(High - Pivot) As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point. If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades. The three most important pivot points are R1, S1 and the actual pivot point. The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries. A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position. Unfortunately life is not that simple and we have to deal with each trading day the best way we can. I have picked a day at random from last week and what follows are some ideas on how you could have traded that day using pivot points.

On the 12th August 04 the Euro/Dollar (EUR/USD) had the following: High - 1.2297 Low - 1.2213 Close - 1.2249 This gave us: Resistance 3 = 1.2377 Resistance 2 = 1.2337 Resistance 1 = 1.2293 Pivot Point = 1.2253 Support 1 = 1.2209 Support 2 = 1.2169 Support 3 = 1.2125 Have a look at the 5 minute chart below

The green line is the pivot point. The blue lines are resistance levels R1,R2 and R3. The red lines are support levels S1,S2 and S3. There are loads of ways to trade this day using pivot points but I shall walk you through a few of them and discuss why some are good in certain situations and why some are bad. The Breakout Trade At the beginning of the day we were below the pivot point, so our bias is for short trades. A channel formed so you would be looking for a break out of the channel, preferably to the downside. In this type of trade you would have your sell entry order just below the lower channel line with a stop order just above the upper channel line and a target of S1. The problem on this day was that, S1 was very close to the breakout level and there was just not enough meat in the trade (13 pips). This is a good entry technique for you. Just because it was not suitable this day, does not mean it will not be suitable the next day.

The Pullback Trade This is one of my favorite set ups. The market passes through S1 and then pulls back. An entry order is placed below support, which in this case was the most recent low before the pullback. A stop is then placed above the pullback (the most recent high - peak) and a target set for S2. The problem again, on this day was that the target of S2 was to close, and the

market never took out the previous support, which tells us that, the market sentiment is beginning to change.

Breakout of Resistance As the day progressed, the market started heading back up to S1 and formed a channel (congestion area). This is another good set up for a trade. An entry order is placed just above the upper channel line, with a stop just below the lower channel line and the first target would be the pivot line. If you where trading more than one position, then you would close out half your position as the market approaches the pivot line, tighten your stop and then watch market action at that level. As it happened, the market never stopped and your second target then became R1. This was also easily achieved and I would have closed out the rest of the position at that level.

Advanced As I mentioned earlier, there are lots of ways to trade with pivot points. A more advanced method is to use the cross of two moving averages as a confirmation of a breakout. You can even use combinations of indicators to help you make a decision. It might be the cross of two averages and also MACD must be in buy mode. Mess around with a few of your favorite indicators but remember the signal is a break of a level and the indicators are just confirmation.

We haven't even got into patterns around pivot levels or failures but that is not the point of this lesson. I just want to introduce another possible way for you to trade. Good Trading Best Regards Mark McRae
Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.

Day trading forex futures with pivot points

By Eric Utley

Curre <script language="JavaScript" type="text/javascript"> document.write('<a ncy tradin href="" target="_blank"><img g is increa src=""/></a>'); sing </script><noscript><a in href="" popul target="_blank"><img border="0" arity amon src="" g /></a></noscript> indivi | View Archives | Print | E-mail this page to a friend | dual invest ors, espec ially those in the United States. Just a few short years ago, it was relatively difficult and costly to access the spot Forex market. But barriers have been broken down, competition has increased, and costs have fallen. As a result, more and more retail traders are entering the realm of spot Forex trading. But there's another way to enter the world of currency trading, and it's through the Chicago Mercantile Exchange (CME). The CME first offered Foreign Exchange (FX) futures in 1972. Today, the exchange offers futures on 41 currency pairs, options on 31 futures contracts, and over $60 billion in liquidity. Currency futures trade on the CME's renowned Globex platform, alongside other popular futures contracts such as the e-mini equity indices. Spot vs. Futures To be sure, there are a some big differences between the contracts that trade in the spot Forex market and the FX futures. Perhaps the biggest -- and arguably most important -- difference is that spot Forex contracts trade over the counter at no particular central location, while FX futures clear at the CME. The central clearing and guarantee of counterparty credit by the CME are huge benefits of FX futures over spot Forex contracts. The dealing details differ dramatically between the two instruments. The table below details some of the biggest differences: Over-the-counter (Spot, Forex) Foreign Exchange Futures $2+ trillion daily turnover $60 billion in liquidity Commission free Commissions Guaranteed stops No guarantees Fixed pip spread Bid/Ask spread 24 hour trading 23 hour trading 100:1 up to 400:1 leverage 20:1 to 50:1 leverage Varying quote currencies All rates quoted in dollars Plain vanilla & Exotic options Plain vanilla options Mini accounts Mini contracts (limited) Interest debits & credits Carrying costs Automatic rollover 3 month expiration cycle Personal Preference Whether you trade spot contracts or futures on currencies will depend upon your own risk tolerance,

equity, and other needs. I've traded spot, through several different dealers, and the futures for many years. I continue to use both instruments in varying situations, alternating my selection to fit different strategies. I like to use the spot contracts when executing very short-term strategies, such as a straddle surrounding a high profile economic announcement or central bank meeting. For example, I would use the EUR/USD spot contract to execute a trade during a Federal Reserve announcement or Nonfarm payrolls release. Or I would use the USD/JPY spot contract to trade a Bank of Japan meeting. The guaranteed stops that some spot Forex dealers offer are very useful when trading around a volatile announcement like a central bank meeting. Additionally, I favor the spot contracts when trading cross rates -- the exchange rates that exclude the U.S. dollar; for example: EUR/JPY, GBP/CHF, AUD/NZD, and GBP/HUF. Cross rates can be an excellent tool to take advantage of varying degrees of relative strength in individual currencies. And they are a great way to trade the currency market when the majors are at an equilibrium (read: trading range). You can find tremendous trends in the cross rates, and you can find hundreds of cross rates at many spot Forex dealers. On the other hand, futures on cross rates are comparatively illiquid and limited. But for the most part, I trade the currency futures. That's because the cost of trading futures is, in most cases, lower than trading spot Forex. I've found futures cost about $20, or less, per round turn, while the spot Forex contracts cost between $30 to $50, and up, per round turn. The lower cost of trading currency futures is why I use the instrument in all of my day trading strategies, including the pivot point methodology. (But please know that you can apply spot Forex contracts to the methodology that I'm about to show you.) Pivot Points Pivot points are a popular tool used by futures traders in all sorts of markets, ranging from equity indices to crude oil. And, sure enough, pivot points are readily applied to trading currency futures. Pivot points are support and resistance levels derived from the previous period's high, low, and closing values. There are a variety of pivot values with which to trade, including monthly, weekly, and daily values. You could even calculate hourly values. When determining which period to trade with, you've got to consider your time frame as an individual and your particular style. I'll use daily pivot points for the purpose of this article since the focus is day trading. Daily pivot points give a structure to each new trading day in the currency market. With these values you can use traditional support and resistance techniques to enter and exit trades. But before I get to the strategy, I'll show you how to calculate pivot values. Pivot Point (PP) = (High + Low + Close) / 3 Resistance 1 (R1) = (2 x Pivot Point) - Low Support 1 (S1) = (2 x Pivot Point) - High Resistance 2 (R2) = Pivot Point + (Resistance 1 - Support 1) Support 2 (S2) = Pivot Point - (Resistance 1 - Support 1) (Pivot values for several different currency pairs are posted on the TradingMarkets web site every day.) The pivot values are plotted as horizontal levels which, in turn, serve as support and resistance. The pivot point itself can be thought of as the day's mid-point, or fulcrum. It's where the buyers and sellers meet to determine the day's trend in a currency pair. The support and resistance levels that are plotted around the pivot point are just that: potential support and resistance. A daily pivot point (in green), S2, S1, R1, and R2 values are plotted on the chart below of the EUR/USD FX future. The chart is a 5-minute interval. Notice how the Euro broke above the pivot point early in the day, and then proceeded to trade up to R1, where it met resistance and gyrated for

the rest of the day.


Follow The Intraday Trend The power of pivot points is unleashed when you follow an unfolding trend during the day, and use the pivot values to measure the magnitude of trend. Additionally, the pivot points can be used to determine entry points into a trade. Applying simple breakout and breakdown entries around pivot points is a powerful way of using the tool. An example of following the trend of the day as it unfolds, and entering trades on the break of pivot values, is illustrated on the 5-minute chart below of the JPY/USD contract. In this example, the Yen began the day near its pivot value, rolled over from R1, and proceeded to breakdown below the pivot point, S1, and S2. The pair dropped by about 60 ticks, providing ample opportunity for a day trader to make money on each breakdown below support. These types of intraday trends unfold a few times throughout the trading week, and they are relatively easy to exploit by following the futures contract through its pivot values.


A second way of leveraging the power of pivots in the currency futures market is by adding a technical indicator that can pinpoint buy and sell signals. You will still want to use traditional support and resistance techniques around the pivot values. The purpose of adding to the indicator is to help in the timing of an entry into a trade. Above all else, though, you want to trade in the direction of the unfolding trend. The MACD (12,26,9) is added to the 5-minute Euro chart below. The MACD generates simple buy and sell signals with the crossing of the fast and slow lines. Quite simply, it's time to buy when the fast line crosses above the slow. Conversely, it's time to sell when the fast line crosses below the slow line. Only the buy signals are highlighted on the chart below because the Euro was in an upward trend during the day. The sell signals are ignored due to the upward trend in the contract. The Euro began the day at 1.2640 and ended near 1.2740 for a move of roughly 100 ticks. That's a lot of potential profit, part of which could have been captured by simply following the trend of the day and taking the buy signals coming from the MACD.


Pivot Point Tips And Tricks Trading with pivot points is not a big secret. Floor traders and dealing desks have been applying the methodology for decades in the currency market. But what separates the profitable traders from the losers is the simple act of following the trend of the day, cutting losses short, and letting profits run to the next pivot value. In addition, there are a few observations I've made over the years that I can add to the simple truth of following the trend. The first tip I want to share is that the best trend days usually unfold when the currency begins the trading day near its pivot point. You might have already made this observation in the two above examples of the Euro and Yen. If you didn't, then take a second and jump back to the above charts, and note how the Euro and Yen began the day at or very near their pivot points. There are usually two or three days out of the week during which the majors such as the Euro, Yen, Pound, and Franc begin trading at their daily pivot. These are the days to look for a big trend to unfold. If the currency that you're trading begins the day far away from the pivot, either below S2 or above R2, then it's probably a day that you want to walk away from. When a currency opens the day at one of the daily pivot extremes, it usually spends the rest of the session gyrating around that level. Avoid trying to trade a reversal of the overnight trend. Occasionally it might occur, but more often than not a big overnight trend will stall out at R2 or S2. The temptation is there to try to squeeze out a small profit, or bet on a reversal of the overnight trend. But the reality is that these are the days that can destroy a trader's equity. You will find two examples below of strong overnight trends leading to massive gaps at the open of New York trading in the futures market. The first is an example of a gap up in the Euro. The pair opened at R2, where it spent the rest of the session. The second example is of a gap down in the Pound. The contract opened below S2, and spent the rest of the day gyrating in a tight range.



These days are best left to the floor traders. In the long run, you'll be better off not even trying to trade during days when the currency futures stage a substantial gap, either high or lower. You'll be better of by waiting for those days when the currency futures open near their pivot points. Profit With Pivots Day trading with pivot points can be applied to the spot Forex market just as they are in the currency futures market. Support and resistance, and the techniques that accompany these price levels, are consistent across all markets. In fact, pivot points have been used across dealing desks for decades

in the spot Forex market. To the individual investor, however, it makes more sense to use currency futures when day trading simply because of the lower costs associated with trading futures. The most important point to remember when applying pivot points to day trading currency futures is to follow the trend of the day, and simply look to enter into an unfolding trend as a pair makes its way through pivot values. Pay special attention to those days when the currency opens at or very near its pivot point. And avoid trading when a contract opens far away from its pivot point, at or beyond S2 and R2 values. Good luck! Eric Utley is a full-time trader with over a decade of experience in equities, equity options, futures, and currencies. He specializes in trading currencies, using a combination of quantitative, technical, and fundamental analysis. He is the lead contributor to, manages a currency trading blog, produces educational programs, and hosts a weekly online seminar.

TradingMarkets Learn Which Are The Best Stocks to Trade Today! Click Here!

<script language="JavaScript" type="text/javascript"> document.write('<a href="" target="_blank"><img src=""/></a>'); </script><noscript><a href="" target="_blank"><img border="0" src="" /></a></noscript>