Why Pivot Point Systems Fail

Subject: Why Pivot Point Systems Fail Fri Feb 01, 2008 7:31 am

What is a pivot point?
Pivot points are levels at which price may turn (either from bullish to bearish or vice versa). It’s a technique developed by floor traders who calculate the points each day before the market opens (from previous day’s data) and then write those levels on the back of their trading card so they have a quick reference while trading in the pits throughout the day. This is the precise reason why pivot points work -- because institutional traders who drive much of the volume follow the same exact levels.

The other question you might have is when to calculate these pivot points considering Forex is a 24 hour market. Good question. I’ve found the best time is 00:00 EST because it’s a couple hours before the London session opens and will carry you through the NY day. The London and NY sessions combined have the most volume of any time during the Forex day.

I use pivot points as one of my good indicators. I feel they are absolutely critical to a trader’s success and they work with more accuracy then any other indicator available. The technique is so popular that many Forex courses are dedicated solely to that methodology.

So, why do pivot point systems fail?

In my experience, the biggest negative to trading with only pivot points is that you don’t know which levels are going to hold. Many times traders have expressed their frustration because they start trading every pivot point and often price slices right through only to stop them out.

What’s the Solution?

There are two important solutions to this problem:

1. Know the strength of the move approaching the pivot point. Most traders don’t have a clue about the strength of the moves, for example, going short at a resistance point when the buying is at very high levels. That pivot is most likely not going to hold at that point. At the very least, find a good volume based indicator to use.

2. Know and Follow the Trend. This seems so basic, but you wouldn’t believe how many traders still try to go against the trend. Trade the pivot points that are going to hold based on the longer term trend. For example, let’s say the EUR/USD is in an uptrend, you would want to find SUPPORT pivots as price comes back down and play the bounces back on the upside. This is a much higher probability trade than trying to find resistance in a strong uptrend. (not that it can’t be done, but that goes back to rule #1).

If you follow these two rules along with pivot points, you will see the accuracy of your trading increase dramatically. You will hit trades that even amaze yourself as price turns on a dime at the levels you have set, often times to the exact pip. I hope this helps. Now, go make some money!

Age : 24 Joined : 15 Jan 2008 Posts : 4 Location : Nigeria

Hi FXpimp, do you have a custom indicator for pivot points or you calculate it manually? I take pivot points from www.actionforex.com but's not very good in my eyes, so I've been trading without looking @ pivot points but trendlines and sometimes Fibo(whick I can @ least draw myself). Pivot points are good because without it, it's like trading in the darkness. BTW, I am still interested in knowing how you go about your pivots points.

Subject: Re: Why Pivot Point Systems Fail Mon Feb 04, 2008 1:19 am

Hi, saintvalx,i tend to calculate my pivot points manually on price charts, using peter bain's method.to calculate the pivot lines for a new trading session, you start by gathering previous OPEN,HIGH,LOW,CLOSE(OHLC)prices for the currency pair you are trading.i like to work with the midnight to midnight (Eastern Time) timeframe because it is 3 hours before the London Session, which starts at 3a.m and gives more mature readings of support and resistance in advance of the London Session

Ist,I open the hourly(1hr) chart for the currency pair I wish to trade
To get the OPEN VALUE, I move mouse point over the individual bars or candles, looking for ''12a.m''.,of the last trading session.Here,I'm talking about the 24hr period just passed (prior to the start of the next trading session).
The close of that bar/candle is the ''open'' figure you'll use for entering into the pivot calculator
Getting the CLOSE VALUE ,move your mouse to the rigght- again touching each bar or candle along the way- until you find the end of the last 24hr period.The closing number for that bar/candle is the 'close'' you will use for entry to the pivot calculator
To get the HIGH/LOW' Value for the previous session,jus simply eyeball the chart, and look for the highest high and lowest low bars in between the open and close entries you just found above.
Now, you got the OHLC from the previous session 24hrs,you are ready to calculate the pivot lines for the coming session. just imput the OHLC numbers u got from ur chart,into the pivot point Excel calculator. the results are the drawn on the hourly, 15min and 5min charts .
anyone needs the pivot point excel calculator, could mail me at bari_witi@yahoo.com.
cheers