FX markets trade technically "purer" than stock markets... something which we are all very thankful for! By that I mean price action reacts much better to resistance and support levels on a chart much better than equity markets do. FX traders and dealers only have supply and demand to make their buy/sell decisions from. It's all based on price levels, which is reflected in the charts. FX markets react better than stocks when it comes to Fibonacci tools, pivot points, trendlines and prior resistance - support levels, etc.
Many strategies can be developed using the pivot level as a base, but the accuracy of using pivot lines increases when Japanese candlestick formations can also be identified. For example, if prices traded below the central pivot (P) for most of the session and then made a foray above the pivot while simultaneously creating a reversal formation (such as a shooting star, doji or hanging man), you could sell short in anticipation of the price resuming trading back below the pivot point.
Using pivot points as the basis of a Forex trading strategy has been around for a very long time and is now slightly out of fashion. It still remains an effective strategy, easy to understand and to implement and the arithmetic involved is minimal. The pivot level is the level at which the market changes direction for the trading day. Using the high, low, and closing price of the previous day, some simple arithmetic can be used to calculate a number of points which can be important support and resistance levels.
One of the key points to understand when trading pivot points in the FX market is that breaks tend to occur around one of the market opens. The reason for this is the immediate influx of traders entering the market at the same time. These traders go into the office, take a look at how prices traded overnight and what data was released and then adjust their portfolios accordingly. During the quieter time periods, such as between the U.S. close (4pm EDT) and the Asian open (7pm EDT) (and sometimes even throughout the Asian session, which is the quietest trading session), prices may remain confined for hours between the pivot level and either the support or resistance level. This provides the perfect environment for range-bound traders.
The main Pivot Level is the most important level (YHigh + YLow + YClose) / 3. The first way is for determining overall market trend. In a trading day, if the price opens under this level, it means the price has a stronger tendency to go down and Bears are stronger. So we can take a short (sell) position. If the price opens above the Pivot Level, it means Bulls are stronger and we can take a long (buy) position. All other levels may work as support and resistance and so we have to be careful when the price reaches them.
Here are the following tips
Pivot points are a technique used by traders to help determine potential support and resistance areas.
There are four main ways to calculate for pivot points: Standard, Woodie, Camarilla, and Fibonacci.
Pivots can be extremely useful in forex since many currency pairs usually fluctuate between these levels. Most of the time, price ranges between R1 and S1.
Pivot points can be used by range, breakout, and trend traders.
Range-bound traders will enter a buy order near identified levels of support and a sell order when the pair nears resistance.
Pivot points also allow breakout traders to identify key levels that need to be broken for a move to qualify as a strong momentum move.
Using pivot point analysis alone is not always enough. Learn to use pivot points along with other technical analysis tools such as candlestick patterns, MACD crossover, moving averages crossovers, the stochastic, RSI, etc. The greater the confirmation, the greater your probability of a successful trade!
The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).