Understanding Pivot Points
Daily Trading Signals by FxPremiere on; Pivot points are used by traders as a predictive indicator and denote levels of technical significance. When used in conjunction with other technical indicators such as support and resistance or Fibonacci, pivot points can be an effective trading tool. When the current price is trading above the daily pivot point, this serves as an indication to initiate long positions.
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Conversely, when the current price is trading below the daily pivot point, this serves as an indication to initiate short positions. The support and resistance levels are used primarily as trade exits. For example, if the market price breaks above the pivot point, R1 and R2 may be used as trade targets. Should the market move to R3, traders may consider exiting the long position and even reversing the position if other technical indicators show a strong reversal trend.
Understanding Pivot Points
Understanding Technical Analysis
Technical analysis is the study of historical price action in order to identify patterns and determine probabilities of future movements in the market through the use of technical studies, indicators, and other analysis tools.
Technical analysis boils down to two things:
- identifying trend
- identifying support/resistance through the use of price charts and/or timeframes
Markets can only do three things: move up, down, or sideways.
Prices typically move in a zigzag fashion, and as a result, price action has only two states:
- Range – when prices zigzag sideways
- Trend – prices either zigzag higher (up trend, or bull trend), or prices zigzag lower (down trend, or bear trend)
Understanding Pivot Points
Why is technical analysis important?
Technical analysis of a market can help you determine not only when and where to enter a market, but much more importantly, when and where to get out.
How can you use technical analysis?
Technical analysis is based on the theory that the markets are chaotic (no one knows for sure what will happen next), but at the same time, price action is not completely random. In other words, mathematical Chaos Theory proves that within a state of chaos there are identifiable patterns that tend to repeat.
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This type of chaotic behavior is observed in nature in the form of weather forecasts. For example, most traders will admit that there are no certainties when it comes to predicting exact price movements. As a result, successful trading is not about being right or wrong: it’s all about determining probabilities and taking trades when the odds are in your favor. Part of determining probabilities involves forecasting market direction and when/where to enter into a position, but equally important is determining your risk-to-reward ratio.
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Remember, there is no magical combination of technical indicators that will unlock some sort of secret trading strategy. The secret of successful trading is good risk management, discipline, and the ability to control your emotions. Anyone can guess right and win every once in a while, but without risk management it is virtually impossible to remain profitable over time.
Understanding Pivot Points
Five Key Drivers of the Forex Markets
1. Central Bank Interest Rates
On a macro level, there is no larger influence in exchange rate values than central banks and the interest-rate decisions they make. In a general sense, if a central bank is raising interest rates, that means that their economy is growing and they are optimistic about the future; if they are cutting interest rates that means their economy is falling on hard times and they are skeptical of the future. This type of visualization may be overly simplified, but it usually is the way central banks respond to changes in their economies.
The complication comes in when traders try to anticipate what the central banks are going to be doing with rates.
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Since the Great Financial Crisis of 2008, most of the major central banks have administered policies of more communication to more effectively signal to the market their intentions for the near future. If a central bank is telling you that they may raise interest rates sooner rather than later, it might be a good time to buy that currency.
2. Central Bank Intervention
Sometimes the value of a currency can inflict undue harm on an economy so much so that the nation’s central bank feels the need to step in and directly influence the value in its favor.
For instance, a nation that is dependent upon exports, like Japan, doesn’t want to see its currency gain too much value. This chart of the price of a DVD player helps visualize that relationship:
|USD/JPY VALUE||PRICE OF DVD PLAYER IN USD||MAKER OF DVD IN JAPAN RECEIVES|
Exporters in Japan would rather see the USD/JPY (U.S. Dollar/Japanese Yen) at 120 than 80 as they would be making much more money for their product. Otherwise, they would have to increase the selling price of their product which could negatively affect the amount sold. This creates quite the dilemma for exporters, particularly when their currency is appreciating.
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To counteract their currency appreciating wildly, central banks can exert their influence by flooding the market with their currency by releasing previously unavailable monies (reserves) and making them available to the public. The increase in the amount of currency available dilutes the value of the money already available and the currency naturally devalues.
Taking advantage of intervention is particularly challenging because unlike interest rate changes, intervention isn’t usually communicated to the masses until after it has occurred. However, the timing of it is difficult to gauge and is usually a surprise.
The majority of the volume traded in FX options is for international business purposes, meaning that businesses can hedge the risk of currency value changes. However, a growing segment of the volume traded is going toward speculation.
Double No Touch (DNT) options are the specific type of option that interests FX traders the most. These types of options are usually placed on round numbers in popular currency pairs like the EUR/USD or USD/JPY and are often targeted by extremely liquid investors. If a currency pair moves quite a bit and it nears these psychological points of interest, sometimes it surges beyond that level and then retreats away from it just as quickly. Other times, the market gets close but never quite gets there before backing away from that level.
4. Fear and Greed
In their simplest forms, fear can turn a falling instrument into an all-out panic and greed can turn a rising market into a blind-buying spree Understanding Pivot Points
The late 1920s is one of the more famous examples, when buying anything and everything on Wall Street was in vogue. Greed was at an apex as the popular thought process would be that stocks would rise in perpetuity. Then Black Tuesday hit and fear led to the Great Depression.
The link between the two emotions can go the other way, too. The crisis in the Eurozone and, in particular, Greece, in the 2010s led to the extreme selling of the EUR currency as fear dominated mainstream thought. Soon after, though, greed kicked in and drove the currency to levels that were detrimental to employment and inflationary dynamics, so much so that the European Central Bank had to force devaluation through a variety of market mechanics.
While it may be easy to point out the effects of fear and greed on markets after they have acted upon them, choosing the moment when they flip in the present is difficult candlestick trading
Some news is planned and some isn’t, but both can move the market in very extreme ways. News that is scheduled is fawned over by many investors and can move markets on a regimented basis.
Not all scheduled news events are market movers. Part of your job as a trader is to recognize when the major market-movers are happening in addition to how to navigate them.
The Economic Calendar is a great resource to help you determine which reports provide the most punch.