The currency pair pivot point is one of keystones in trading at Forex.
First of all, let us introduce the following designations (notions), necessary for the subject.
“High” is the maximum at the previous day;
“Low” is the minimum at the previous day;
“Close” is the price of closing at the previous day.
Generally speaking, there are the three principal criteria.
1. There is the stock reserve – i.e., the difference between Low and High per the trading session. For instance, as regards GBP/USD pair, this difference can exceed 100 points in a trading day.
2. The reader must also consider the reversal point of the currency pair movement (the pivot point) in the daily trading session. Thus, it is easy to calculate the possible profit that could be gained by a trader regularly.
3. If “the trend is the friend” (see Book 1), it is necessary to work along the trend direction. Under these conditions, the detection of the trend pivot points can prevent losses that could be conditioned by the following factors
· A change in the trend direction.
· Besides, this conception of the trend pivot points permits us to understand when a deal must be opened in a new trend – i.e., in the beginning of the currency pair movement but not in the middle of it. The author especially doesn’t recommend opening a deal at the end of a new trend.
Briefly to say, the skill of detecting the real pivot point is necessary for the regularly gaining of profit at Forex (for pity, the knowledge of it is insufficient).
The given system makes the foundation of the Pivot Points tactics, well-known all over the world.
The pivot point can be calculated according to the formula: Pivot=(High+Low+Close)/3
(the designations introduced are submitted above).
After the calculation of Pivot, one can determine the levels of resistance and support according to the formulae given below:
R1=2Pivot – Low
S1=2Pivot – High
R2=Pivot + (R1 – S1)
S2=Pivot – (R1-S1)
R3=High + 2*(Pivot – Low)
S3=Low – 2*(High – Pivot)
Here R1, R2, R3 are the levels of resistance; S1, S2, S3 are the levels of support.
Thus, in its essence, the Pivot Points tactics is binary (binomial). That is, the next move is the logical continuation of the previous one. The point of reversal (pivot) is the keystone of this movement. The trend is going on. Subsequently, the point of reversal (pivot) of the given trend is being shifted.
Not without a reason all first-rate banks and fund institutions make use of such simple calculations during 50 years and more.
Briefly to say, this classical tactics of Pivot Points is well known all over the world. However, the application of it still could not change the ratio of successful traders to losers (1/20).
Now the reader must try to see the drawbacks of the classical method of detecting Pivot Points. The goal is to understand the advantages of the Pivot Points technique according to Masterforex-V system.
1. How one can pick out an appropriate time frame for calculating the maximum (or minimum) and the price of closing. One must keep in mind that Forex market is functioning twenty-four hours a day regularly. That is, in Europe, America and Asia pivots are different under the same conditions. The reason is that the three variables mentioned (High, Low, Close) are different in various countries.
Let us emphasize again.
“High” is the maximum of the previous day;
“Low” is the minimum of the previous day;
“Close” is the price of closing at the previous day.
For instance, one can take a look at a chart that depicts USD/JPY pair movement during May 22-24, 2006. There it is clearly depicted that the next-day pivots in Moscow, Tokyo, London and New York would be cardinally different. Evidently, it is conditioned by the difference in calendar days. Consequently, all the three components of the classical Pivot Points are depicted in the above-submitted expression (High+Low+Close)/3).
Chart 2.4.1. (For view the picture see notes in end of article)
The Pivot points are calculated arithmetically. The result is rather an arithmetic-mean magnitude (as the moving average) than the determining of a real point, after crossing of which the currency logically makes a spurt (jump) towards the opposite direction.
For instance, the pivot arithmetic-mean magnitude can be equal to 50% of the recoil. As it is evident, this value cannot be helpful in a flat. What is more, it can even be harmful in the flat if the recoil could reach 62% and 76%.
For instance, a trader can open a deal at 50%-recoil against the trend. At the same time, the currency at 62%-recoil makes the U-turn (reversal) towards the previous trend continuation.
As an example, the reader can look at Chart 2.4.2. This figure clearly indicates that on June 6, 2006 EUR/USD had fallen from the local maximum at 1.2981 down to 1.2922. After this, it raised by 76% – up to 1.2962. Further, within the intra-day trend, the currency pair has ascended down to the point 1.2594. Approximately this makes about 400 points.
Chart 2.4.2. (For view the picture see notes in end of article)
In addition, the reader must take into account the following factors. During a day a currency can cross the Pivot Point towards different directions several times. This is why the classical Pivot Point cannot be regarded as a real point, at which deals should be opened.
As an example, let us examine EUR/USD pair movement on June 14, 2006 (see Chart 2.4.3 – M-15 chart).
To start from the currency pair movement on June 13 2006, the pivot has made (1.2617 + 1.2529+ 1.2545)/3 = 1.2564).
Chart 2.4.3. (For view the picture see notes in end of article)
A Pivot must be dynamical. The author states the following. A currency pair can go through 70-100 points in European trading session. At American session, the pivot must change its value – as the true (real) point of reversal. For instance, it can be the reversal correction beginning of the Pivot previous value. Under such conditions, a trader can close his deals before the beginning of the reversal in question. Otherwise, a trader can keep on a deal being opened along the trend further on (a “long-term” deal). This is possible if the price would not “cross” the Pivot towards the reverse (opposite) direction.
Let us examine a chart that depicts GBP/USD pair movement during June 29-30, 2006.
As one can see, the currency pairs have broken through the Pivot Point during the weekly trend. However, these currency pairs have not once crossed the pivot point towards the opposite direction during the session trend – notwithstanding the fact that these currency pairs have passed through several hundreds of points during a day and a half.
Chart 2.4.4. (For view the picture see notes in end of article)
Chart 2.4.5. (For view the picture see notes in end of article)
In different time frames the pivot must indicate different points. One must distinguish the reversal in the intra-day trend from the reversal in the intra-week trend. Then, again, the trend of duration of several weeks presents the principally different pattern – and so on.
However, according to the classical approach to Pivot-Points problem, just one value is considered – i.e., that of the previous day. Hence, there logically arises the following question. The reversal of which trend does the pivot make? Again, the reader must keep in mind that this pivot is calculated according to the above-given formula (High+Low+Close)/3 on the previous day.
R. Axel (from Dow Jones Agency) has developed his own technique of the pivot calculation when the levels of the previous day don’t fit into this formula (High+Low+Close)/3. This discrepancy also confirms that the classical method of determining Pivot Points is imperfect.
One can make the following conclusions. The above-given examples clearly illustrate the principal difference between approaches to the notion of Pivot Point as a real point of reversal of currency pairs at Forex. That is, there is the Forex classicists’ approach and, in contrast to it, Masterforex-V’s viewpoint. According to the latter system, the following procedures must be done.
1. One must calculate the correction and reversal in various TF – to start from the intra-day session (M15) and up to several weeks (D1). This clearly depicts the difference between the correction and reversal. For instance, the following situations can take place.
· The reversal can occur during the session trend when the currency pair movement does not exceed Pivot in a weekly trend, which is equal to the weekly session correction but not to the reversal.
· The reversal can occur during the session trend when the currency pair movement does exceed Pivot in weekly trend. It is the first sign of the reversal that can occur within the weekly trend.
2. Such correlation between the two types of trends permits us to do the following.
· To gain profit during the session trend.
· To understand the duality (binarity) in the direction of the currency pair movement (the continuation or cancellation (abolition) within a session trend or longer types of them.
3. The 50%-recoil indicates rather not the trend reversal but quantitative changes in it. Here is implied either the further development of the currency pair movement or the given pair transition to the flat. According to Masterforex-V, one must correlate these tendencies with other factors – such as the time of movement, correlation between the ally currency pairs and technical levels in various TF, etc.
Now let us regard this problem as it is presented in Masterforex-V Trading Academy. Again, one must take a look at the chart where EUR/USD pair movement during June 5-6, 2006 is depicted. The reader must try to detect Pivot Points by himself.
· Pivot Points in the intra-day trend;
· Pivot Points in the weekly trend session.
This information is expedient. Due to it, one can understand the following facts (and make use of them).
1. one can detect the point at which the “bear” intra-day trend starts;
2. one can detect the point where the beginning of the “bear” weekly trend can be confirmed for sure.
3. On can see at what points the trend heavy (strong) corrections – or the trend recoil – could occur.
4. One can understand the conditions for the reversal of the trend and its changing from the “bear” type to the “bull” one. However, this has not happened in the case in question.
5. In addition, a trader must take into account the reversal point abolition (failure). Regarding this aspect, one could state in a deal for a long period.
Note: Full text of this article and pictures of examples you can see on http://masterforex-v.su/002_004.htm
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