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## Pivot Points Trading

## Tutorial

## Learn How to Use Pivot Points

## in Forex Trading

A pivot is generally an area where due to
market congestion price is likely to turn
and go in the opposite direction. Pivot
points are calculated by adding the
previous day, high price, low price and
closing price then dividing the result by
three.
Using Pivot points in day trading are
popular because they are predictive
rather than lagging, providing a trader
with 7 possible turning points each day.
(Pivot, 3 support, 3 resistance.) With
modern day trading methods many
tools are available to automatically
update your daily pivot points without
the tedious job of having to calculate
new Pivot Points daily.
We assume that if the price opens below
the daily Pivot Point then the bias for
the day is short, if price opens above the
Pivot Point then the bias for the day is
long. (This concept is only valid until the
Pivot Point has been breached, at which
point price can reverse.)
NB: The Pivot Point can provide the
trader with three vital ingredients,
namely an entry point, a stop loss, and a
profit target.
As the points are calculated on the
previous day’s movement we can apply
them to any trading time frame without
altering the points as would happen
with other indicators.
The three important points most traders
concentrate on are the actual pivot
point, the R1 (resistance 1) and S1
(support 1)
Generally by the time price gets to the
S2, S3 or R2, R3 points then the market
could be overbought or oversold so
these points are used to exit trades
rather than enter new positions.
### Break Out and Reversal trades.

For the 1st example we have used the
3rd of April 2012 daily movement to
look for trades on the 4th of April. As we
can see on the 15 min EUR/USD chart,
the price opened well below the PP at
1.3300 and stalled at the S1 price
forming a small channel. The Bias at this
point was clearly short.
Note: Here we had 2 possible entry
methods to short the market at this
point.
1. We could enter short below the S1
area with our stop loss above the
previous high or channel high. Our 1st
target will be the Support 2 line where
we can close half of our position and
move our stop loss to Break even and
target S3 to close the remainder of the
trade. If we had entered at the break of
the S1 line our entry price was 1.3231
and our stop loss at 1.3243 (12 pips +
spread). For the more conservative
trader we could have waited for the
channel breakout at 1.3215 using the
same stop loss at 1.3243 (30 pips stop
loss.)
The risk to reward ratio on both trades
is greater than 2:1 making it a
worthwhile trade. The vertical lines
represent the day’s open and closing
points. The trade worked out well and
eventually achieved the second target
the following day.
Based on the chart above we have
looked at 2 useful methods to trade the
Pivot points, the breakout where price
broke below the channel and the pull
back where price broke below the S1
pulled back to the S1 then failed and
continued down to the S2.
### Trading Pivot Points with a standard

### MACD

As with most other trading systems we
can use other indicators to confirm
pivot point entries. On the following
chart the shaded area is for the trading
day 16th March using the March 15th
data to calculate the Pivot Points.