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Firstly, what are pivot points ?
These are sometimes referred to as “ floor pivots”. They have been around for sometime and previously future traders ( day traders) used them on the exchange floor ( the pit).
They are essentially support and resistance points and some believe that these are key levels, where price may bounce off. However, always remember that trading is about probabilities and thus, this won’t work all the time.
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How are pivot points calculated?
Normally you have a central line, called the pivot line and then 2 lines on each side of this line – called R1 and R2 ( resistance) and S1 and S2 ( support).
The formula can be found at the following link :
http://hubpages.com/hub/Pivot_Point
Pivot points look at the previous day’s high, low and close and calculations are done from there.
However, some software packages such as the Visual Trader (www.cmsforex.com)
Will draw these automatically for you.
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How can pivot points be used?
Some people look for a “reaction “ ( i.e. the behaviour of price ) at these points. Others may use them as some kind of a target to aim for, providing that risk : reward ratio is justified.
Let’s have a look at the following chart :
It shows the 15min chart of € / USD
I have drawn the pivot lines. The black line by point A, is the central pivot line. As we can see, price almost touches this line. Then it travels north to R1 ( dark blue line) and the retraces slightly ( point B). A retracement method that can be used, would have you enter long ( buying the market to go up) just above point B.
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Target in this case can be point C ( i.e. R2) and in this case, the price hits target.
You should always have stops in place ( either mental or physical), just in case the market does not co-operate.
Anyway, hope you have enjoyed this tutorial.
Until next time
Alex
MagicalForex.com
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Alex graduated in Accountancy in 1994 and has previously worked in a banking environment. However, Alex’s true passion is trading and investing in general. As someone who cares about fellow traders, he likes to help them whenever he can through the peaks and troughs of trading. You can find out more about Alex via his website: www.MagicalForex.com
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our .
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