Pivot Points are widely used by day technical traders to quickly determine where FOREX market sentiment may change between bullish and bearish. Pivot Points are also commonly used to find likely Support and Resistance levels or Supply and Demand Zones. These points are vital points, areas or zones where price can possibly reverse from the current direction of the market. From my personal experience the closest to the holy Grail trading system is trading price actions around pivot areas.
You see candlesticks are technical indicators on their own as i wrote in my previous article, they enables us visualize the market clearer and if well interpreted could be one of the most useful tool in predicting price fluctuation in any financial market. The default Mt4 technical indicators like Moving Averages, Bollinger Bands, Stochastic, RSI, MACD e.t.c are all lagging in behavior. This means they are all slow to react to price fluctuations and can give you late signals.
However we can not discard the purpose of the default MT4 oscillators, more especially the Relative Strength Index and the Stochastic. If well blended with price actions on pivots, we could filter out bad trades and increase our profitability as a whole in trading. This isn’t a guarantee of a holy grail trading but with good money management and balanced trading psychology we could optimize this approach to trading.
There are several pivots that are been formed in the financial markets. We have the derived pivots which can be calculated from a candle’s high, open, low and close value’s. These type of pivots are called the daily or weekly or monthly resistance and support 1, 2, 3. Mid daily, weekly and monthly pivots shouldn’t be disregarded as well. We also have pivots formed from turning points due to one reason or the other be it a fundamental or sentimental or psychological cause. This type of pivots are established in zones which can be called demand and supply zones.
Also there are several types of price action candle stick formations and patterns that emanate on daily basis in the markets. However i majorly use the engulf price pattern and the pin-bar price formation on the 30 minutes time-frame to trade around pivots because it provides smaller stop loss entries. This is because its very simple, easy to master and has a high strike winning rate. To maximize profits and filter out bad signals, i incorporate the Commodity Channel Index to pick set-ups on extreme levels of the CCI at +100 for sell reversal signals and -100 for buy reversal signals.
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.