The pivot point of currency pair; Classic method of pivot point and technical levels calculation; Weakness of the classic pivot point techniques; Role of the pivot point in successful trading from the Masterforex-V Trading System point of view; Example

The currency pair pivot point is one of keystones to trading in the Forex market.

Generally speaking, there are the three principal criteria:

1. Daily or session range – the difference between high & low. For instance, regular GBP/USD daily range exceeds 100 points;
2. Day or session reversal or pivot point ;
3. Keeping in mind that “Trend is your friend” (see Book 1) and that it is wealthier to keep trades along the trend direction ,

And above mentioned criteria help to calculate the possibility of everyday winning trading on regular basis. Just as comprehension of the pivot point delivers a trader from :
A. Losses, because of trend alteration;
B. Getting less profit, because of opening a trade in the middle not in the beginning of new trend, and surely not by its fading!

Briefly, the know-how of detecting the real pivot point is necessary (but insufficient) for regular profitable trading in the Forex market.

The following system lays in the basis of the world renowned pivot point tactics.

The pivot point can be calculated according to the formula: Pivot=(High+Low+Close )/3, where:
“High” is the last day or session high;
“Low” is the last day or session low;
“Close” is last day or session closing.

 After the calculation of pivot point, a trader can determine the levels of resistance and support according to the formulas 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 day or session resistance; S1, S2, S3 are the levels of day or session support.

Thus, the pivot point tactics is binary by its grounds. That is, the next market move is the logical continuation of the previous one and the point of reversal – pivot point – is the milestone of this movement. If the trend is going on, the pivot or reversal point is expected to move along.

That is the reason why those simple calculations are supposed to be widely used by all first-rate banks and funds for more than half a century.

In short, this classical tactics of pivot point is well known all over the world. However, its wide application has not changed the ratio 1/20 of successful traders to losers.

Now let’s try to understand the drawbacks of the classical pivot point detecting method. By grasping the idea a trader can get closer to and understand the advantages of the Masterforex-V Trading system pivot point detecting technique.

What are the classical pivot point method’s fails?

1. How a trader picks up an appropriate time period for calculating the maximum, minimum and closing price? Forex market quotes are supplied on the regular twenty-four hours a day basis. So, in Europe, in Americas and in Asia daytime and session time and accordingly pivot points are different, aren’t they? All the three variables mentioned (High, Low, Close) are subject to modification in different areas in the world.

Let us emphasize again:                      Pivot=( High+Low+Close )/3, where
                                                          “High” is the last day or session high;
                                                          “Low” is the last day or session low;
                                                          “Close” is last day or session closing.

For example, take a look at the Figure 5-1 illustrating USD/JPY currency pair movement on May 22-24, 2006. You may see it clear that the next-day pivots during the business hours in Moscow, Tokyo, London and New York will be cardinally different. Evidently, this has happened by the time zone difference. In this connection all the three components of the classical pivot point equation above ( High+Low+Close )/3 will be different for the traders situated in the different parts of the world.

Figure 5-1.

2. The pivot points are calculated arithmetically. The result is an arithmetic value with same moving character as Moving Average rather than the real point or level, by intersection with which the price logically makes some sharp turn towards the opposite direction.

For example, the arithmetic value of pivot point might be equal to 50% of correction. Evidently, this value cannot be helpful during the flat price movement. It could even bring unfavorable effect in the flat when rollback or correction reaches either 62% or 76% of previous impulse’s value (After calculating the pivot point, trader enters the market against the trend by 50% dip. But with overcoming bullish force the currency price at the rollback level of 62% turns back towards the previous direction).

Figure 5-2 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 weekly trend, the currency price has descended down to the point 1.2594. The full way down counts about 400 points.

Figure 5-2.

3. During one trading day a currency price can cross the pivot point several times up and down. That is why the classical pivot point cannot be used as an entrance point.

For example, EUR/USD M15 Chart price m ovement on June 14, 2006 has shown in the Figure 5-3.

The pivot point of price movement started on June 13, 2006, is calculated as: (1.2617 + 1.2529+ 1.2545)/3 = 1.2564.

Figure 5-3.

4. A pivot point should be dynamical. If the price of a currency has rallied in European hours for 70 or 100 points, then the pivot point as a true point of reversal (i.e. correction turning point or new impulse turning point) must be changed for American trading session and trader should have an opportunity to exit before the true reversal happened, or keep a trade along the trend if the pivot point has not been triggered by the price.

Please take a look at the Figure 5-4, illustrating GBP/USD pair movement about June 29-30, 2006.

As you can see, the currency price has broken through the pivot point of weekly trend. However, the British pound after breaking the weekly pivot upwards, haven’t been broken it once downwards then for the next 2 days, passing over several hundred points.

 

Figure 5- 4.

Figure 5-5.

5. In different time frames the pivot point must indicate different levels, because:

·  the daily trend reversal is one thing and

·   the weekly trend reversal is another, and

·   the reversal of a trend more than several week length is something totally different, and so on.

According to the classical approach to the pivot point problem, only one value is considered –that of the previous day. Hence, the next question logically arose: which trend reversal does this pivot forecasts if it was calculated according to the formula: ( High+Low+Close )/3, where HLC are values of the previous day bar.

6. Mr. Axel Rudolph from Dow Jones Agency has developed his own technique to calculate the pivot point, when the previous day HLC values don’t fit into this formula: ( High+Low+Close )/3. This discrepancy also confirms that the classical method of pivot point computation was imperfect.

Brief totals :
Examples given have clearly illustrate the principal difference between approaches to the pivot point as a real point of reversal of currency price in the Forex market. Classical approach was shown above, and the pivot point from the Masterforex-V Trading System’s point of view is as follows:

1.   The pivot point should be calculated separately for all of time frames used, starting from the minute charts and so forth till daily or even weekly chart. After it being computed in the proposed way, the difference between the price correction and reversal becomes clearly visible. For instance, the following situations can take place:
If there happened reversal inside the trading session and the price curve did not break the weekly pivot point – that is weekly trend correction rather than reversal.
If there happened reversal inside the trading session and the price curve has broken the weekly pivot point – that is significant characteristic of the beginning weekly trend reversal.

2.   Such correlation between the trends of two named types takes us to the following:

* To gain profit during the session trend.
* To see the BINARY nature of short-term trend as session and long-term trend as weekly interplay in the way of trend prolongation or cancelling.

3.   The impulse’s 50% rollback indicates rather not trend’s reversal but qualitative change in the currency price movement, or even its switch to the flat range. According to the Masterforex-V Trading System, a trader must join this price moving pattern with other system dimensions such as movement time, correlation with the “ally” currencies, technical levels in other time frames, etc.

Next task is for our reader – using the learned knowledge of the Masterforex-V Trading System, on the chart EUR/USD dated June 5 till June 9, 2006, illustrated in the Figure 5-2, define the pivot points for:

A.   Intraday trend on the everyday basis;

B.   Weekly trend .

This information is essential to understand:
* from what level weekly bearish trend had been started
* by what level weekly bearish trend has been confirmed
* what are the levels of possible trend’s correction or reversal
* the conditions for trend reversal to bullish (that has not been happened)
* reversal cancellation point, and from which level a trader could open the long trade.