Effective market timing - or when to enter and exit a trade - is always a top issue among FX traders. This is where pivot points can be used in an effective Forex trading system.
Pivot points are basically a turning point in the currency markets. They are the point at which market sentiment has effectively switched from over bought to over sold or bearish to bullish, or any way you want to describe a market switching directions.
Pivot Point Magic
The fact is that many Forex traders trust and rely on them because they work. And the magic of why they work is because so many traders trust and rely on them. It is a self-supporting system. They are used to measure the relative strength and weakness of the currency pair you are trading.
The Calculations
If are trading manually (i.e. without an automated trading system, or trading robot) then you will have to do some math. If you have an automated system then this work will most likely be done inside the program for you.
So lets look at the math. The most common pivot point calculation is a simple average of the high, low and close of a previous period (or session).
So for example the High + the Low + the Closing Price / 3 = your pivot point.
So lets make up some pretend numbers for the EUR/USD and take a look
Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458
Then to calculate the pivot point you would come up with
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439
But what does the number mean. It simply means that if the market sneaks past the price of 1.2439 then the Bulls are prices higher. And vice-versa if the currency pair is trading below this 1.2439 then bears are effectively pulling prices lower. And for trading decisions this means that the prices will most likely stay under or over that Pivot Point until the next trading session.
Ahh, but here in lays the problem of pivot points in Forex trading: the markets never close. So what determines when one trading session ends and when another begins? For most traders they refer to Greenwich Mean Time as the beginning and end of the "trading day." This would mean that the trading day begins at 00:00 GMT and tends at 23:59 GMT.
An Effective Forex Pivot Point Trading System
Pivot points turn out to be best used inside a system for quick-turn trading. If you want to learn more about an automated way to trade Forex pivot points using an automated trading system visit > http://ForexTradingRobot.info a popular site for veteran traders and beginners alike.
