Pivot point trading is an effective method for defining reversal, resistance and support levels of the Forex market. Many traders use pivot points to predict daily market price movements.
The Pivot point strategy includes seven technical levels: 3 resistance levels, 3 support levels and the actual pivot point level. The 3 most important pivot points are Resistance 1, Support 1 and the actual pivot point. This is what the strategy postulates: if the market is trading above the pivot point, then the bias for the day is bullish. If the market opens below the pivot point then the bias for the day is bearish. By the time the market reaches Resistance 2, Resistance 3 or Support 2, Support 3, the market will already be overbought or oversold and these levels should be used for exits rather than entries.
There are 4 methods for computing pivot point levels: Pivot, Woddie, Fibonacci and Camarilla. The Pivot method is a
standard one. Woddie, Fibonacci and Camarilla are alternative methods.
Floor traders developed Pivot Points in the equity and commodity exchanges. These points are calculated based on the high, low and closing prices of previous trading sessions. Forex traders use them to forecast support and resistance levels in the current or upcoming session. These support and resistance levels can be used to set entry and exit points for stop losses and profit taking.
Because of the Forex market is so large and liquid Pivot Point can be a very useful help. The large size of the market, especially in liquid currency pairs like the EUR/USD or EUR/JPY, can support you to avoid market manipulation which would keep the market from adhering to technical principles like support and resistance.
PIVOT POINT is the point where the market reverses and so a turning point. If the market is above the Pivot Point it is treated to be a bull market which means that buyers are dominant. When it goes below the Pivot Point it becomes a bear market and sellers are dominant.
RESISTANCE means a high point in the market where buyers meet a strong opposition of sellers. A rising market which is reaching resistance has a big potential of falling back down.
SUPPORT means a low point in the market where sellers meet a strong opposition of buyers. A falling price which is reaching support has a big chance of climbing back up.
Support and resistance levels are mostly difficult to break through but of couse they can fail, otherwise the market would be the whole time going in only one direction.
There is a rule which you should have in mind: when a support or resistance level is broken it becomes the opposite force which means that a broken support will become a resistance and a broken resistance will become a future support.
Have a look at the video to get an overview over Pivot Point Trading: