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How Pivot Points Help Keep Your Head Straight When Volatility Is High

By , Forex Trading Instructor
06 June 2013 19:00 GMT

Article Summary: Today’s USDJPY drop was the largest in 3 years. Moves like this are rare but as traders, we must be ready for anything. Pivot Points on your chart can help you frame likely move limits so you know when enough is enough and where you should be focused for the next likely target.

When markets begin moving, they often have an avalanche like effect. As one big move begets another, price can start to spiral out of control. When your money is on the line, the most difficult aspect of this is knowing where you should look to take profits or get off if the move is going against you.

Pivot_Points_And_Volatility_In_Forex_body_Picture_6.png, How Pivot Points Help Keep Your Head Straight When Volatility Is High

When these large moves begin to unfold, it is important to have objective levels to reference. As a trader, objectivity is key because it keeps out of the dreaded fear or over-confidence zone that plagues many traders. These objective levels can be achieved through Pivot Points which are calculated off the most important levels of the prior period to see where price could go now.

Learn Forex: Pivot Levels Help You Gain a Reference Point in Big Moves

Pivot_Points_And_Volatility_In_Forex_body_Picture_2.png, How Pivot Points Help Keep Your Head Straight When Volatility Is High

Presented by FXCM’s Marketscope Charts

The GBPUSD Daily chart above has the monthly pivot applied. The pivot spans for the entire month and is calculated at the close of the prior trading period. So the monthly pivot and corresponding levels for June were able to be calculated at the close of trading on the last trading day of May.

The benefit of these objective levels is that you can use them as milestones so to speak in a trend or strong move. As you can see above, the entire month’s trading has been above the monthly pivot of 1.5146 except for one small test that was rejected on the first trading day of the month which provides the trade with a bullish bias. The pivot or 1st level of support can be used as a stop and the corresponding levels of resistance can be used to scale out of a trade.

Pivot_Points_And_Volatility_In_Forex_body_Picture_3.png, How Pivot Points Help Keep Your Head Straight When Volatility Is High

Courtesy of, Trading the Pivot by James Stanley

When volatility is high, Pivots become extremely helpful for multiple reasons. A favorite of many traders is that they give a very concrete level that a strong move will likely run out of steam. While normal trends can run out of steam near the second level of resistance in an uptrend or support in a downtrend, moves like today can turn our sights to the 3rd level of resistance or support.

Learn Forex: In a Strong Move Downward, the 3rd Level of Support Can Act As a Target

Pivot_Points_And_Volatility_In_Forex_body_Picture_4.png, How Pivot Points Help Keep Your Head Straight When Volatility Is High

Presented by FXCM’s Marketscope Charts

Putting This All Together

In trading as in life, there are no guarantees, only opportunities. Pivots help traders by trading in the path of least resistance which is the side of the pivot that price currently favors. Therefore, price above the pivot encourages traders to be long and look at resistance levels as potential exit levels and price below the pivot encourages traders to be short and focus on support levels for exits.

Regarding which Pivot to use, Classic is the most used and therefore usually more reliable. For those trading on the Daily candle charts, a monthly Pivot often works best and is what you see on my chart. For those on a 4 hour or 1hour candle chart, a Weekly Pivot would work well.

Pivots are based on Price Action alone. If you would like to minimize your analysis, price action trading can be a great place to start. If you would like to learn more about price action trading, you can register for a free online course here.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@fxcm.com.

To be added to Tyler’s e-mail distribution list, please click here.

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06 June 2013 19:00 GMT