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Forex Pivot Points- Mapping Your Time Frame

It is useful to have a map and be able to see where the price is relative to previous market action. This way we can see how is the sentiment of traders and investors at any given moment, it also gives us a general idea of where the market is heading during the day. This information can help us decide which way to trade.

Pivot points, a technique developed by floor traders, help us see where the price is relative to previous market action.

As a definition, a pivot point is a turning point or condition. The same applies to the Forex market, the pivot point is a level in which the sentiment of the market changes from �bull� to �bear� or vice versa. If the market breaks this level up, then the sentiment is said to be a bull market and it is likely to continue its way up, on the other hand, if the market breaks this level down, then the sentiment is bear, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price can't break the pivot point, a possible bounce from it is plausible.

Pivot points work best on highly liquid markets, like the spot currency market, but they can also be used in other markets as well.

Forex Pivot Points

In a few words, pivot point is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.

Why PP work?

They work simply because many individual traders and investors use and trust them, as well as bank and institutional traders. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.

Calculating pivot points

There are several ways to arrive to the Pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session).

Pivot point (PP) = (High + Low + Close) / 3

Take for instance the following EUR/USD information from the previous session:

Open: 1.2386

High: 1.2474

Low: 1.2376

Close: 1.2458

The PP would be,

PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439

What does this number tell us?

It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. On both cases this condition is likely to sustain until the next session.

Since the Forex market is a 24hr market (no close or open from day to day) there is a eternal battle on deciding at white time we should take the open, close, high and low from each session. From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT .

Besides the calculation of the PP, there are other support and resistance levels that are calculated taking the PP as a reference.

Support 1 (S1) = (PP * 2) � H

Resistance 1 (R1) = (PP * 2) - L

Support 2 (S2) = PP � (R1 � S1)

Resistance 2 (R2) = PP + (R1 � S1)

Where , H is the High of the previous period and L is the low of the previous period

Continuing with the example above, PP = 1.2439

S1 = (1.2439 * 2) - 1.2474 = 1.2404

R1 = (1.2439 * 2) � 1.2376 = 1.2502

R2 = 1.2439 + (1.2636 � 1.2537) = 1.2537

S2 = 1.2439 � (1.2636 � 1.2537) = 1.2537

These levels are supposed to mark support and resistance levels for the current session.

On the example above, the PP was calculated using information of the previous session (previous day.) This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point in a weekly or monthly basis is mostly used by long term traders, but it can also be used by short time traders, it gives us a good idea about the longer term trend.

S1, S2, R1 AND R2...? An Objective Alternative

As already stated, the pivot point zone is a well-known technique and it works simply because many traders and investors use and trust it. But what about the other support and resistance zones (S1, S2, R1 and R2,) to forecast a support or resistance level with some mathematical formula is somehow subjective. It is hard to rely on them blindly just because the formula popped out that level. For this reason, we have created an alternative way to map our time frame, simpler but more objective and effective.

We calculate the pivot point as showed before. But our support and resistance levels are drawn in a different way. We take the previous session high and low, and draw those levels on today's chart. The same is done with the session before the previous session. So, we will have our PP and four more important levels drawn in our chart.

LOPS1, low of the previous session.

HOPS1, high of the previous session.

LOPS2, low of the session before the previous session.

HOPS2, high of the session before the previous session.

PP, pivot point.

These levels will tell us the strength of the market at any given moment. If the market is trading above the PP, then the market is considered in a possible uptrend. If the market is trading above HOPS1 or HOPS2, then the market is in an uptrend, and we only take long positions. If the market is trading below the PP then the market is considered in a possible downtrend. If the market is trading below LOPS1 or LOPS2, then the market is in a downtrend, and we should only consider short trades.

The psychology behind this approach is simple. We know that for some reason the market stopped there from going higher/lower the previous session, or the session before that. We don't know the reason, and we don't need to know it. We only know the fact: the market reversed at that level. We also know that traders and investors have memories, they do remember that the price stopped there before, and the odds are that the market reverses from there again (maybe because the same reason, and maybe not) or at least find some support or resistance at these levels.

What is important about his approach is that support and resistance levels are measured objectively; they aren't just a level derived from a mathematical formula, the price reversed there before so these levels have a higher probability of being effective.

Our mapping method works on both market conditions, when trending and on sideways conditions. In a trending market, it helps us determine the strength of the trend and trade off important levels. On sideways markets it shows us possible reversal levels.

More Thoughts On Forex

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The foreign exchange market dwarfs the combined operations of the New York, London, and Tokyo futures and stock exchanges. According to its size and scope it is many times larger than all other markets. Stats shows that spot transactions and forward outright Forex trading take place in the inter-bank market. 51% of the market is in spot Forex transactions, followed by 32% in currency swap transactions. Forward outright Forex transactions represent another 5% of this daily turnover, with options on �interbank� Forex transactions making up another 8%. Therefore the inter-bank market accounts for 96% of the global foreign exchange market, with the remaining 4% being divided among all the global futures exchanges.

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The FX FOREX spot market does not have a physical location or a central exchange this makes it's very convenient for a beginner trading forex currency. Due to the lack of a physical exchange the forex market operates on a 24 hour basis spanning from one time zone to another across the major financial centers.
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Japan, on the other hand, imports 99% of its oil. Their reliance on oil imports makes their economy especially sensitive to oil price fluctuations. If oil prices continue to rise, the price of Japanese exports will be forced to rise as well, weakening their position in the world market. Over the past year, there has been a close correlation with rises in oil prices and drops in the value of the yen.
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Easy Forex News

European Mid Morning Update 9th April 2008

Wed, 09 Apr 2008 04:15:33 -0400
Consumers continue to preserve capital as the credit crisis remains unsolved

Releases from Japan:
Prior Current
March Machine Tool Orders (P) (MoM) -0.5% +6.9%

At long last the BOJ has acquiesced to the market’s clear decline and has dropped the prior assessment of being in a “moderate expansion” in favor of a “slowing in economic growth” due to high energy prices. However, it still insists that following the current situation it will return to moderate growth once more.

In spite of CAPEX plans crashing in the Tankan Report it also maintains that CAPEX and consumption will remain firm. It also notes that small firms are feeling the squeeze in current market conditions but sees supply-demand as more or less balanced.

All I can say is that in my experience Japanese consumers are more conservative than their U.S. or European counterparts and this places domestic demand under continued pressure while energy prices remain high. One should also remember that overseas investments have been popular with Japanese with local returns low and I know of several people personally who have been burned by subprime linked investments…

Releases from Europe:

February Forecast Actual
German Trade Balance EUR 15.7bn 16.9bn

March
Nationwide Consumer Confidence 77.0

Germany’s February Trade Balance narrowed from January’s EUR 17.1bn but actually came in higher than forecasts. Of all the EU member countries Germany has remained the most stable performer. Even so it is seeing a gradual erosion in growth but this has been fairly mild up to this point. How consumers react could prove to be the single biggest issue to face the economy.

In an unexpected release the Nationwide Building Society saw its consumer confidence index drop to its lowest level since launch in May 2004. Weakening property prices, uncertainty over the credit crisis and inflation are undermining confidence in their jobs. Only 14% of the respondents felt their economic situation will be better in six months time…

The following economic releases are due today:

Q4
Euro-zone GDP (F) (QoQ) +0.4%
Euro-zone GDP (F) (YoY) +2.2%

February
U.K. Industrial Production (MoM) +0.1%
U.K. Industrial Production (YoY) +1.2%
U.K. Manufacturing Production (MoM) +0.0%
U.K. Manufacturing Production (YoY) +1.5%
U.S. Wholesale Inventories (MoM) +0.5%

Globally, consumers appear to be closing their check books and cutting up their credit cards to preserve capital ahead of what is quickly being recognized as a systemic hemorrhaging of the global credit markets. The act of consumers shutting up shop will only serve to deepen the crisis and this will no doubt be a topic of discussion at this week’s G7 meeting.

Confusion has set in as the Dollar fails to bend to the collective bearish will of the market. In Asia it has remained range bound but with a mild bullish bearish bias. However, with the BOE and ECB rate decisions due tomorrow the easy option of succumbing to the general malaise looks to be likely as the motivation to push the Dollar’s limits in either direction remains low.

Early European numbers are having no impact and mainland numbers to come are unlikely to inspire any strong reactions. If there is any weak area to aim for then it is in the Pound with the February industrial and manufacturing production numbers capable of undermining the Pound further if these turn out less than forecast.

Equally, any much stronger numbers will probably cause the market to review the expectation of a 0.25% cut tomorrow by the BOE.

Otherwise today could see a repeat of yesterday’s subdued trading.

Note important support and resistance areas:

USDJPY EURUSD USDCHF GBPUSD
Res: 103.86-00 1.5887-01 1.0249-73 1.9750-74
Res: 102.45-82 1.5750-98 1.0171-17 1.9690-12

Spt: 101.74-16 1.5644-72 1.0065-90 1.9605-50
Spt: 100.87-22 1.5578-10 0.9980-13 1.9505-46