Pivot Points in Forex: Drawing Your Time Cycle

It is very useful to have a chart that can observe the correlation between prices and previous market behavior. This way we will see how the sentiment of traders and investors is at the given time, and also give us general advice on the direction of the market during the day. This information will help us decide which direction to trade.

Pivot points, a technique developed by floor traders, help us see how prices relate to previous market actions.

As a definition, a pivot point is a turning point or condition. The same applies toforeign exchange marketThe pivot point is the level at which the market transitions from a "bull market" to a "bear market" or vice versa. If the market breaks through this level, the opinion says it is a bull market and will continue to rise. On the other hand, if the market breaks through this level, the opinion says it is a bear market and expects to continue to fall. And at this level, the market is expected to have some support/resistance, and if the price cannot break through this pivot point, a rebound from then on is justified.

Pivot points work best in highly liquid markets, such as currency markets, but can also be used in other markets.

Pivot Point

In simple terms, a pivot point is the level at which traders and investors perceive a shift from a bull market to a bear market or vice versa.

Why are pivot points effective?

They are simple and effective because many individual traders and investors, as well as banks and institutional traders, use and believe them. Every trader knows that pivot points are a measure of the strength of any market.

Calculate Pivot Points

These are several ways to calculate pivot points. The most accurate way we found the results was by averaging the highest price, lowest price, and stop price for the previous time period.

Pivot Point (PP) = (Highest Price + Lowest Price + Stop Price)/3

For example, the following information about EUR/USD in the previous time period:

Open: 1.2386

Max: 1.2474

Minimum: 1.2376

Stop trading: 1.2458

The pivot point will be,

PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439

What does this number tell us?

Simply tell us that if the market price is higher than 1.2439, the winning side will push the price higher. If the market price is lower than 1.2439, the winning side will push the price lower. In both cases, this condition will be maintained until the next round.

Since the foreign exchange market is a 24-hour market (there is no daily stop or open), deciding when we should collect the open, stop, and highest and lowest prices is a constant struggle. From our perspective, the time to generate more accurate predictions is the opening at 00:00 GMT and the closing at 23:59 GMT.

In addition to the calculation of pivot points, some support and resistance levels are also calculated for 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)

Here, H represents the highest price in the previous cycle and L represents the lowest price in the previous cycle

Continuing with the above example, 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 used to note the support and resistance levels during the current cycle.

In the example above, PP is calculated using information from the previous period (the previous day.). This way we will find possible intraday resistance and support levels. But it can also be calculated by using data from the previous week or month to determine these levels. By doing this we are able to see views from longer periods in the past. We can also find possible support and resistance levels for the entire week or month. Calculating pivot points on a weekly or monthly basis is usually used by long-term traders, but can also be used by short-term traders and can provide us with a good view of long-term trends.

S1, S2, R1 and R2...? Select the target

As already stated, pivot points are well-known techniques and are simple and effective due to the use and belief of many investors and traders. But what about other support and resistance zones (S1, S2, R1, and R2,), using some mathematical formula to predict support and resistance levels is the goal. It is difficult to rely blindly on them, just because the formula measures these levels. For this reason, we have established another way to graphically visualize our time periods, simpler but more explicit and effective.

We calculate the pivot points as shown above. But our support and resistance levels are plotted in a different way. We collect the highest and lowest prices from the previous time period and plot these levels on today's chart. The same thing is done for the previous time period. Therefore, we have our PP and 4 more important levels plotted on our chart.

LOPS1, the lowest price in the previous time period.

HOPS1, the highest price in the previous time period.

LOPS2, the lowest price in the previous time period.

HOPS2, the highest price in the previous time period.

PP, pivot point.

These levels will tell us the strength of the market at any given time. If the market price is higher than PP, the market is considered to be in a positive uptrend. If the market price is higher than HOPS1 or HOPS2, the market is in an uptrend and we only make long trades. If the market price is lower than PP, the market is considered a negative downtrend. If the market price is lower than LOPS1 or LOPS2, the market is in a downtrend and we only consider short trades.

The psychology behind this approach is simple. We know that there are some reasons why the market stopped at the highest/lowest price in the previous time period, or earlier. We don't know what the reason is, and we don't need to know. We only know the reality: the market reverses from this level. We also know that traders and investors have memories that they remember where prices stopped before, and the probability is that the market reverses again from there (maybe for the same reason, maybe not) or at least finds some support or resistance at these levels.

The most important thing about this method is that support and resistance levels are objectively measured.KCM ForexRather than levels derived from mathematical formulas, prices have reversed there before, so these levels will likely be very effective.

Our graphical approach is effective in two market conditions, when trending and in unilateral markets. In trend markets, it helps us determine the strength of the trend and the level of importance. In unilateral markets, it shows us possible reversal levels.