Forex Pivot Points Book. Series of Free Forex ebooks
Step-by-step guide and strategy on using Pivot Points in Forex
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How to use Pivot points in Forex trading? The strategy.
We calculate Pivot points on daily basis using daily charts and then use those Pivot levels on 15 minute charts — our main charts — where we will look for entries, stops and exits.
We know we have to calculate Pivot points every single day, so that each morning we start with new fresh daily Pivot points, calculated from midnight to midnight EST.
Let's look at the current chart to see how Pivot points were found.
As you can see we use only 5 major Pivot point levels: R2, R1, PP, S1 and S2.
After Pivots are in place traders should start taking notes:
First, they should note where the market has opened today in relation to the Pivot Point (PP): above the Pivot Point or below it. The answer to this question provides the first clue about traders' biases for the day, e.g. if the market has opened above Pivot Point, traders will be bias towards taking long positions, on the contrary, opening below the Pivot Point would suggests shorting for the day.
Then traders should look at how far the price opened from the Pivot (PP), and make extra notes when it opened below S1 or above R1 level which is considered to be a quite distant open.
With some small distance away from the Pivot Point it is considered to be a good morning for trading. It is very much suggested to wait for a pull back towards the Pivot line before taking a position. 15 minute charts in this case help to catch the right moment for entry.
With the second — distant opening (below S1 or above R1) — we have very high expectations that the price will try to correct such "distant irregularity" and thus instead of progressing further away from Pivot Point it will try to move back towards the Pivot — the gold-middle point of the day. As a result, we will typically see a ranging market which does not produce much of the trading opportunities. The expectations are that the price will revolve around Pivot Point for the rest of the day — nothing to do for us, we stay out.