Hi friend! And now, after writing about other topics of interest, I finally get to address something I am equally passionate about – Forex Pivot Points: Best Forex Support and Resistance.
These are the nine support and resistance levels that I will cover extensively in this blog post – a vital constituent of forex technical analysis.
As promised in my last blog post on forex trading techniques, I am now going to get into pivot point trading in great detail. So, fasten your seatbelt, and listen up closely. You’re in for a real treat – a game changer for your forex trading.
Before I forget, if you would like a copy of my pivot point calculator, which is the best support and resistance calculator, all you have to do is drop me a line at the Contact link.
I differ from other forex traders in that I favour the ‘win-to-loss’ ratio over risk-reward analysis. In other words, if your trading results in eight wins and two losses consistently, your win-to-loss ratio is obviously 8:2.
That’s good enough for me – meaning, I’m perfectly fine with taking a trade, risking 30 pips (via a 30-pip stop) to gain only 30 pips. Some traders would be horrified by that notion, but that’s their privilege.
As you stick with me from one forex blog post to the next, you will see that the style of forex trading I favour is as close to risk-free as you will get.
Today’s blog post is a good step in the direction of convincing you whereof I speak.
The road to forex wealth is paved by taking calculated risks, and this is no exception.
So, let’s get going… but first, here’s the Table of Contents. See you on the back side.
Table of Contents:
Forex Pivot Points
Forex Basics Background
The Straight Skinny
Forex Pivot Points in Use
GBPUSD 1 Hr. with OHLC
Forex Time Zones
Expected Low and High
GBPUSD 1 Hr. with M2/M4
Forex Pivot Points Trading
Effect of Forex Trends
Uber Forex Broker
Forex Pivot Points
– Forex Basics Background –
I guess you could call this a mini forex trading tutorial, because I cover this subject matter in such great detail.
Pivot points are the ultimate application of forex support and resistance levels and the best form of forex forecast I know of in forex trading.
The title of this blog post is very telling, because the two component parts of it are really synonymous with each other. In other words, the nine pivot points are in actual fact support and resistance levels – perhaps the most accurate and powerful levels available to forex traders.
In my sixteen-plus years in the forex, I have had considerable experience with a myriad of forex trading indicators and forex trading methods. I covered three forex trading techniques in my last blog post – forex scalping, forex swing trading, and The Shotgun Trade.
Believe me, those forex strategies are the best-of-the best in my books. I briefly touched on MACD and MACD divergence – MACD being one of my favourite indicators. As a matter of fact, my next post will be on MACD divergence. So, stay tuned for that.
But, if I had to pick one of the many forex tools available to us, it would have to be pivot points – the best forex support and resistance indicator. They make spot trading so much easier because of the buy/sell points of reference. And, they are extremely accurate.
Get this… with the pivot points I use, including the four mid-points I developed, you will automatically know the expected high and low for the forex session underway. And, you will know if price is in a buy area or a sell area. Pretty cool, eh?
Forex trading necessitates that a forex trader use some form of support and resistance reference points. They are used to determine when and where to enter a trade, place stops, take profits, etc.
Out of the basket of forex tools available to us, the one tool that stands out as, not only providing superior identification of forex support and resistance, but also minimizing risk, is the pivot point.
Originally used by floor traders on equity and futures exchanges, pivot points have proved to be extremely effective in the forex market – so much so that the projected support and resistance levels created by pivot points seem to be more effective in the forex than any other market.
This is because market manipulation is virtually impossible in the forex due to its large size – especially with regards to the most liquid pairs.
Accordingly, the forex market respects the technical considerations of support and resistance better than less liquid markets.
Not only are forex pivot points used to highlight forex support and resistance levels, but they are also used by forex traders to ascertain where forex sentiment might alternate between bullishness and bearishness.
Resistance levels are viewed as a ceiling, because this is where price either stalls in its trajectory, or continues on up after a brief pause – depending upon the prevailing trend.
On the flip side, we have price levels called support, where price either bottoms out, or falls through – again depending upon the trend in place.
There can be a certain amount of volatility between areas of support and resistance. Price can pivot off of a support level, moving up to a resistance level, only to be rebuffed, and then retreat.
This is where trend direction comes into play. Quite simply, it is a matter of buying in an uptrend when price bounces off a support pivot, and selling in a downtrend when price is repelled by a resistance pivot.
To summarize… forex support and resistance levels are areas on forex trading charts where price experiences difficulty in proceeding further in its path.
Support pivot points are seen to prevent price from declining further below a certain pivot point, while resistance pivots tend to behave like price ceilings, where price seems to stall, and hesitate in its ascendancy.
Before we continue, I have to share a story with you. It goes back to when I wrote a best seller on trading the three markets – commodities, currencies, and stocks. Up to that point, I hadn’t been using my pivot points for the forex. Somebody who bought my book sent me an e-mail saying that my pivot points worked better in that market – and the rest is history.
So, let’s get right down to it shall we.
The Straight Skinny
Why don’t you have a look through the following four screen shots, and then I’ll see you on the back side, where I’ll jump right right into exploiting the use of forex pivot points.
Okay, you’re back. Now let’s have a look at how the pivot points are calculated using my pivot point calculator.
This is a perfect example of how to determine forex support and resistance in forex trading.
Please refer to the diagram a little bit further down, as we go through this. The objective here is to determine the nine forex pivot points for the next forex session, or the current session, if you’re already into it – a session being defined as from midnight ET one day to midnight ET the next.
I like that forex session because midnight ET is three hours before the London open – the busiest time in the forex. The pivot calculations based on midnight ET to midnight ET produce pivot points that offer the best support and resistance levels for that forex swing trading point (the London open).
Of course, you could choose another timeframe – say, from 13:00 pm ET to 13:00 pm ET, if your objective is to trade the New York close. The same goes for any of the other forex time zones noted in that sub-section coming up a little bit later.
Just follow the same logic for your pivot calculations I am about to get into. Of course, the midnight ET-to-midnight ET calculations hold true for the entire 24-hour period that follows, and can be used to trade any of the forex time zones during that timeframe.
Regardless of which forex session you wish to trade, be sure to calculate your pivots at least three hours before it starts.
To accomplish the pivot calculations, assuming we are still working the midnight ET window of opportunity, we need to input four figures into the pivot point calculator – open, high, low, and close. We obtain those numbers off one of the forex trading charts for any given forex session – the one hour chart.
Let’s define each entry:
Open – Where the last forex session opened (eg., at 00:00 09/26/16).
High – The highest high in between the open and the close for the last session.
Low – The lowest low in between the open and the close for the last session
Close – Where the last forex session closed. On most forex trading charts, this will be the opening figure (eg., at 00:00 09/27/16). We don’t want to use the closing figure at that time, because it represents the close one hour beyond midnight.
Now, you simply enter those values into the pivot point calculator, click on open space on the spreadsheet around that area, and presto – you have pivot points for the next forex session. See the results two screen shots down.
I should point out that there are other calculators out there. There are even forex trading charts that do these calculations for you, and plot them automatically.
Those calculations will more than likely differ from mine, but at least how you trade using forex pivot points, as I explain in this blog post, will still be relevant.
I prefer to use my pivot point calculator, because it more closely approximates the results of floor traders. That’s good enough for me. Plus, I added my mid-points, called M levels. More on that coming up.
As I said at the outset, if you would like a copy of my pivot point calculator, all you have to do is ask. Just contact me.
Referring to the calculated results in the screen shot above, eight pivot points surround the central pivot point (CPP). The ones below the CPP represent buying levels, and the ones above sell levels. More on that a little bit later.
A word on Projected Range and Actual Range in the screen shot above. Actual Range is the difference between the open and close for the previous day. Projected Range is the difference between R2 and S2 for the current day, or next day if that forex session has not yet arrived.
Remember… a forex session is defined as the period from midnight ET one day to midnight ET the next, with the proviso I mentioned earlier about trading other forex time zones.
Let’s now turn our attention to something that I developed years ago that is absolutely awe-inspiring and near and dear to my heart – that still amazes me to this day. It’s called the M Level Paradigm, which works off forex major support and resistance levels. Talk about Holy Grails. Sure, there is no such thing I know, but hear me out.
Have a look at how this Paradigm works, and you will be absolutely stunned and amazed. To make a fat story thin, if the close for the previous forex session was lower than the open, then the expected low and expected high for the next forex session are M1/M3.
Correspondingly, if the close for the previous session is higher than the open, the expected low and expected high for the next one are M2/M3.
Let’s see how this works. Please refer to the 1 hour forex trading chart for the GBPUSD a little bit further down.
The expected low and expected high for 09/27/16 were M2 and M4. See for yourself how that turned out. Just like magic, price found both levels.
How incredible is that! All a forex trader needs to know is where price is going, and what the profit potential is. Here you have price taking out M2 at 5 am ET, and forming a forex swing trading point leading up to the New York open.
Price then took off like a banshee and found M4. That run up from M2 to M4 chalked up 77 pips (read, $770 per lot in a standard account). Bet you can’t make that kind of money trading stocks. I know I sure can’t.
To be fair, this outcome doesn’t occur every day. But, the M Level Paradigm is worth paying attention to, because you never know when it will achieve the same results, be they M1/M3 or M2/M4.
I find that you can usually expect one of the M levels to kick in for any given forex session, but not necessarily both.
The M levels and all of the other forex pivot points give you a leg up in anticipating price’s next move.
The M Level Paradigm is a perfect example of forex trading using forex support and resistance.
Have a look at the next few screen shots, and then join up with me again on the back side, where I will illustrate a practical application of pivot points in relation to the forex trading chart for the GBPUSD, which I mentioned above. See you there.
Forex Pivot Points in Use
Let’s carry on shall we. Referencing the chart down a little bit further down, you can see that I drew the dotted lines delineating where midnight ET is for 09/26/16 and 09/27/16.
You will also notice where I obtained the open, high, low, and close figures from for the forex pivot calculator.
I simply entered those numbers into the calculator, clicked on empty space nearby, and you can see the resulting nine calculations superimposed on the chart.
I drew dotted lines for M2 and M4 on the chart to show you how price respected these two important mid-point levels.
I should point out that you don’t have to draw some or all of the pivot points on your forex trading chart. Your platform may do that automatically for you, as a pivot point indicator. But, I doubt that the results are as accurate as mine, given mine were inspired by the floor traders.
The main thing to note is what the levels are, as you are trading. You could simply print off the calculated values, and have them close by for ease of reference – or, save them in a doc, and use that instead.
Price doesn’t move that fast. So, if you keep referring to the forex pivot points in the document or on the printout, you will know exactly what price is up to.
Below the chart, I have included a screen shot of the forex time zones, which represent potential forex swing trading points and the best time frame for forex support and resistance.
You can see on the chart where I have marked London Close and New York Open forex trading swing points, just to prove how significant such times are. The other forex time zones are equally as effective.
No need for you to be at your desktop all day long, or continually checking your handheld device. Just make sure you tune in around those times. That is where the forex price action is.
The most active forex session is the London session that begins in and around 3 am ET, and concludes in and around 11 to 11:30 am ET.
The window of opportunity for any forex session is as per the times noted in that screen shot of forex time zones, give or take an hour or so on either side of each time.
The main thing is to be aware of those times, and to be on the lookout for forex swing trading points, as noted in my last blog post on forex trading techniques.
Another one of the forex time zones to be on the lookout for is 8:30 am ET – the news hour just after the New York open at 8 am ET.
News can initiate a forex swing trading point, especially when the nonfarm payrolls (NFP) data comes out the first Friday of the month.
It’s called NFP Trading – an excellent example of how forex fundamentals can affect price action. I will be doing a blog post on that topic later on, as it deserves its own unique attention.
After you finish studying the four screen shots below, let’s re-join on the back side to finish the discussion on how to use pivot points to amp up your forex trading.
GBPUSD 1 Hr. with OHLC
(Chart via ProRealTime.com)
Forex Time Zones
Expected Low and High
GBPUSD 1 Hr. with M2/M4
(Chart via ProRealTime.com)
Forex Pivot Points Trading
Welcome back. Let’s continue to explore how we use pivot points to make money. That’s why we’re here, right.
Please refer to the two diagrams below.
The area below the Central Pivot Point (CPP) is the buy area – the area above the sell area.
As you monitor price action in relation to the nine forex pivot points, you should pay attention to what price does at any one of the forex time zones. In other words, does a swing in price action take place? That’s a gift.
How does price behave near one of the pivot points? A pivot re-test presents a great trading opportunity.
Is price trending away from the CPP, and in which direction? Where is it likely to turn around – at what support or resistance level, or at what M level?
It is important to recognize that, if price is in a buy or sell area (i.e., below or above the CPP). That will dissuade you from taking a trade, if it is in the wrong area with respect to the kind of trade you are contemplating.
There are other factors to take into consideration, but that is all part of forex technical analysis.
There are times when you would want to buy in the sell area and sell in the buy area. Let’s look at that now. Please skip over the two diagrams below, after you have studied them, and then take up again on the back side, where I will explain.
Just when you think you’re getting this, I’m going to turn things on their head, and talk about the role trend plays in all this.
You have to take forex trends into account when you are observing price action in relation to the pivot points.
For example, if price is trending up, it would be perfectly okay for you to buy above the CPP, just so long as you keep in mind that you’re in a sell area, and that you need to be on the lookout for a potential price reversal.
The same applies to price trending down, all the while you want to sell below the CPP. Again, that is perfectly fine, if you remember that you’re in a buy area, and that price will eventually reverse direction.
In either case, price may stop at a support or resistance level, or there may be a candle reversal pattern enter the picture, or MACD may experience divergence, or there may be a trendline break, etc.
I won’t get into all those potential occurrences, as they deserve comprehensive treatment in another blog post. Stay tuned for that.
Now you know how to trade forex support and resistance in forex market.
Please have a look at the screen shots below, and then meet up with me again on the back side, where I will summarize.
Effect of Forex Trends
Market makers, noise traders, and professional forex traders alike use pivot points to identify potential forex support and resistance levels. The support and resistance levels represented by these points signify areas where price can potentially change direction.
More importantly, they represent areas below and above the central pivot point where price can assume buying or selling status respectively.
From a forex trader’s perspective, the M levels can be used to ascertain where price might achieve the expected high and the expected low for the day.
Forex pivot points originated in the trading pits in Chicago and, as such, hold a lot of weight. Forex traders of all persuasions pay close attention to these levels, and that is why you will see price seem to magically stop at a forex pivot point or bounce off of it, and head in the other direction – or just carry on in its original direction.
A word on forex trends… I like to work with forex pairs that are trending up, as reflected on the daily chart for position trading purposes, or on the 1 hour chart for forex swing trading opportunities.
That way, you have a leg up on how to play the pivot points. In other words you know, as you observe price action in relation to those levels, that the bias is to the upside, and that that’s what the price momentum is. You can be looking for buying opportunities accordingly – i.e., buy dips in the uptrend.
When I talked about forex trends earlier in relation to the role reversal of pivot points, this is the overall trend I prefer to work with – UP!
I never look for short trading opportunities, as there are just too many opportunities to the upside for long trades.
Forex trading with forex pivot points is just one more way of seizing the currency trading opportunities in that market – the largest market in the world. But, I respectfully submit, that they are perhaps the most powerful forex trading tool that exits.
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“Everybody has the will to win, but only those who prepare actually do.” Bobby Knight, famous basketball coach.
“Your vocation lies where your passions intersect with the needs of the public.”
“I do what I fear, and fear disappears.” Franklin D. Research
“Each act is its own reward.” Emerson
George Soros: (paraphrased)
“There is no shame in being wrong, only in failing to correct our mistakes – once we realize that imperfect understanding is the human condition.”
“Markets are constantly in a state of flux and uncertainty. By discounting the obvious and betting on the unexpected, money is made.”
“Stock market bubbles don’t just appear out of thin air. They are grounded in reality, but with reality distorted by a misconception.”
Regarding forex pips, here’s a pip value calculator worth considering: http://ca.investing.com/tools/forex-pip-calculator.
If you would like the best pivot point calculator, all you have to do is let me know at the Contact link.
A good support and resistance MT4 indicator can be had at the same link.
At www.ProRealTime.com, they offer you a myriad of forex trading indicators, including pivot points as a forex support and resistance indicator.
The best book on trendlines and determining forex trends, in my opinion, is Tom DeMark’s New Science of Technical Analysis.
There you go my friend… forex support and resistance in the form of forex pivot points – the best nine levels that are created by a support and resistance calculator like mine in forex trading circles. Therein lies the potential for profitable forex trading.
If you are just now learning forex trading, and feel you need some more free forex training, I am here for you. Just let me know at the Contact link. I can provide one-on-one forex trading lessons, and even be your forex mentor.
I also do forex consulting. That can be arranged as well at the same link.
Don’t forget you always have the option of obtaining forex money management in the form of forex managed accounts at the forex broker Tallinex.
I hope you got a lot out of this free forex training. There are more forex trading lessons coming up.
There’s a whole lot more to learn from my previous blog posts: VIX, After Hours Trading, Trading Volume, Stock Trading Stops, Currency Trading Strategy, How to Pick Stocks, Stock Trading Rules, Three Winning Stock Trading Strategies, and Forex Trading Techniques.
And, you can always check me out at the About link.
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Here’s To Your Success and Quality of Life,
Peter R. Bain
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About Peter R. Bain
Peter R. Bain
I am a speaker, trader, writer, aviator, car nut, Harley enthusiast but, above all else, I am here for you at TradingSmarts, which I founded some 15 years ago.
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Thank you for this write-up on Pivots. I have read through so many times 🙂
It appears to me however, that knowing whether a trading day would be M1/M3 or M2/M4 is in hindsight, at the consummation of the trading session; as you like to put it; “after the fact”.
I want to know how to tell prior to the commencement of a trading day, whether it would be one or the other.
Can that be done? I think so.
Would you help me a little more here…
Hi Dr. Fisayo… thanks for your query – I replied to your comment via e-mail, but here is the gist of what I said:
The only way to know whether the next trading day will be M1/M3 or M2/M4 is to use the closing info from the day before the one you are about to trade, or the one you are trading. Using my program, you need the high, low, and closing numbers, and they are only available when a session closes. Then, you use my calculator to derive the pivots for the next day. My program relies on OHLC info. During any trading day, you obviously know the opening value, but you don’t know the H, L, and C figures until the trading session ends at midnight ET.
By that I mean, the closing number is the closing value. The high and low figures you have to search for by eye-balling throughout the trading day to see what they were.
The M1/M3 or M2/M4 predictions are important to know, because they alert you to the possible low and high levels for the next day.
I hope this helps. If not, please let me know.
I understand that the PP calculator gives all the possible pivot points for the next trading session when the previous day’s OHLC values are entered in.
It is clear that the PP are ‘reactionary’ levels to determine buy or sell signals in relation to the daily trend.
What remains fuzzy to me is after determining all these possible pivot levels, a trader still cannot categorically determine whether the next trading day (that is the session s/he intends to trade) would be M1/M3 or M2/M4 until that trading day is over, hence the reference to ‘hind sight’.
I hope I’m making myself clear and not missing anything here.
It’s been my experience (even after calculating all the possible pivots) that just when I think price which had previously reached M2 would go on to M4, does a reversal at M3 and retraces all the way down to M1.
Thus, I can only state at the end of that day, that it was an M1/M3 day.
Do you see my point? 🙂
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