The use of pivot points is increasingly becoming popular among traders in the Forex market. Experienced traders normally use it as a way of identifying potential support and resistance levels before the market even opens. This
strategy is a very instrumental technique for trading currencies since it forecasts the market movement instead of lagging it. Most successful traders use this strategy on a daily basis to get a glimpse of the next day's trading range before the market even opens.
When the market opens below the daily pivot point, it is regarded to be very bearish and might initiate a downtrend. In such a case, you can play the bounce by entering short positions until price strikes the next support level.
On the other hand, when the market opens above the daily pivot point, it is regarded to be very bullish and might signify that an uptrend is imminent. To profit using the pivot point strategy, you can enter long positions until price hits the next resistance level. Nonetheless, you should be cautious since the resistance levels in pivot points are usually very strong.
Another strategy of trading pivot points is by playing the bounce off the middle pivot. The central pivot line is usually a very strong level. As such, when price bounces off this level, it normally does this with a lot of strength. Similarly, when price breaks through this level, it usually does this with equally the same strength. With a lot of hard work and dedication, you can learn how to trade the bounce off this level and gain good pips from Forex trading.
Further, you can mix pivot points with Japanese candlesticks patterns to identify profitable trading opportunities. Since it combines more than one strategy, this can be a very beneficial way of reaping big returns from Forex trading. When the price of a currency pair has pierced through a number of pivot resistance lines before forming a bearish candlestick pattern, such as the evening star, the likelihood of a sell off and imminent downtrend are very possible.
Just like with any other strategy for trading Forex, the confirmation of the pivot point strategy is usually very rewarding. This is why you should not use this strategy in isolation. In addition to candlestick patterns, you can use oscillators and momentum indicators to give you more reasons for entering trades. And, you should always do a thorough analysis before placing trades using this technique.
Shawn James has 7 years experience in the Financial Markets, for PRO Investment Bank as an Investment Analyst, before becoming a Forex trading expert.
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