Pivot Strategies: A Handy Tool For Forex Traders For many years, traders and market makers have used pivot points to determine critical support andor resistance levels. Pivots are also very popular in the forex market and can be an extremely useful tool for range-bound traders to identify points of entry and for trend traders and breakout traders to spot the key levels that need to be broken for a move to qualify as a breakout. In this article, well explain how pivot points are calculated, how they can be applied to the FX market, and how they can be combined with other indicators to develop other trading strategies. Calculating Pivot Points By definition, a pivot point is a point of rotation. The prices used to calculate the pivot point are the previous periods high, low and closing prices for a security. These prices are usually taken from a stocks daily charts. but the pivot point can also be calculated using information from hourly charts. Most traders prefer to take the pivots, as well as the support and resistance levels, off of the daily charts and then apply those to the intraday charts (for example, hourly, every 30 minutes or every 15 minutes). If a pivot point is calculated using price information from a shorter time frame, this tends to reduce its accuracy and significance. The textbook calculation for a pivot point is as follows: Central Pivot Point (P) (High Low Close) 3 Support and resistance levels are then calculated off of this pivot point using the following formulas: First level support and resistance: First Resistance (R1) (2P) - Low First Support (S1) (2P) - High Likewise, the second level of support and resistance is calculated as follows: Second Resistance (R2) P (R1-S1) Second Support (S2) P - (R1- S1) Calculating two support and resistance levels is common practice, but its not unusual to derive a third support and resistance level as well. (However, third-level support and resistances are a bit too esoteric to be useful for the purposes of trading strategies.) Its also possible to delve deeper into pivot point analysis - for example, some traders go beyond the traditional support and resistance levels and also track the mid-point between each of those levels. Applying Pivot Points to the FX Market Generally speaking, the pivot point is seen as the primary support or resistance level. The following chart is a 30-minute chart of the currency pair GBPUSD with pivot levels calculated using the daily high, low and close prices. The open. There are three market opens in the FX market: the U. S. open, which occurs at approximately 8am EDT, the European open, which occurs at 2am EDT, and the Asian open which occurs at 7pm EDT. Figure 1 - This chart shows a common day in the FX market. The price of a major currency pair (GBPUSD) tends to fluctuate between the support and resistance levels identified by the pivot point calculation. The areas circled in the chart are good illustrations of the importance of a break above these levels. What we also see when trading pivots in the FX market is that the trading range for the session usually occurs between the pivot point and the first support and resistance levels because a multitude of traders play this range. Take a look at Figure 2, a chart of the currency pair USDJPY. As you can see in the areas circled, prices initially stayed within the pivot point and the first resistance level with the pivot acting as support. Once the pivot was broken, prices moved lower and stayed predominately within the pivot and the first support zone. Figure 2 - This chart shows an example of the strength of the support and resistance calculated using the pivot calculations. The Significance of Market Opens One of the key points to understand when trading pivot points in the FX market is that breaks tend to occur around one of the market opens. The reason for this is the immediate influx of traders entering the market at the same time. These traders go into the office, take a look at how prices traded overnight and what data was released and then adjust their portfolios accordingly. During the quieter time periods, such as between the U. S. close (4pm EDT) and the Asian open (7pm EDT) (and sometimes even throughout the Asian session, which is the quietest trading session), prices may remain confined for hours between the pivot level and either the support or resistance level. This provides the perfect environment for range-bound traders. Two Strategies Using Pivot Points Many strategies can be developed using the pivot level as a base, but the accuracy of using pivot lines increases when Japanese candlestick formations can also be identified. For example, if prices traded below the central pivot (P) for most of the session and then made a foray above the pivot while simultaneously creating a reversal formation (such as a shooting star. doji or hanging man ), you could sell short in anticipation of the price resuming trading back below the pivot point. A perfect example of this is shown in Figure 3, a 30-minute USDCHF chart. USDCHF had remained range-bound between the first support zone and the pivot level for most of the Asian trading session. When Europe joined the market, traders began taking USDCHF higher to break above the central pivot. Bulls lost control as the second candle became a doji formation. Prices then began to reverse back below the central pivot to spend the next six hours between the central pivot and the first support zone. Traders watching for this formation could have sold USDCHF in the candle right after the doji formation to take advantage of at least 80 pips worth of profit between the pivot point and the first level of support. Figure 3 - This chart shows a pivot point being used in cooperation with a candlestick pattern to predict a trend reversal. Notice how the descent was stopped by the second support level. Another strategy traders can use is to look for prices to obey the pivot level, therefore validating the level as a solid support or resistance zone. In this type of strategy, youre looking to see the price break the pivot level, reverse and then trend back towards the pivot level. If the price proceeds to drive through the pivot point, this is an indication that the pivot level is not very strong and is therefore less useful as a trading signal. However, if prices hesitate around that level or validate it, then the pivot level is much more significant and suggests that the move lower is an actual break, which indicates that there may be a continuation move. The 15-minute GBPCHF chart in Figure 4 shows an example of prices obeying the pivot line. For the most part, prices were first confined within the mid-point and pivot level. At the European open (2am EDT), GBPCHF rallied and broke above the pivot level. Prices then retraced back to pivot level, held it and proceeded to rally once again. The level was tested once more right before the U. S. market open (7am EDT), at which point traders should have placed a buy order for GBPCHF since the pivot level had already proved to be a significant support level. For those traders who did do that, GBPCHF bounced off the level and rallied once again. Figure 4 - This is an example of a currency pair obeying the support and resistance identified by the pivot point calculation. These levels become more significant the more times the pair tries to break through. Conclusion Traders and market makers have been using pivot points for years to determine critical support andor resistance levels. As the charts above have shown, pivots can be especially popular in the FX market since many currency pairs do tend to fluctuate between these levels. Range-bound traders will enter a buy order near identified levels of support and a sell order when the asset nears the upper resistance. Pivot points also enable trend and breakout traders to spot key levels that need to be broken for a move to qualify as a breakout. Furthermore, these technical indicators can be very useful at market opens. Having an awareness of where these potential turning points are located is an excellent way for individual investors to become more attuned to market movements and make more educated transaction decisions. Given their ease of calculation, pivot points can also be incorporated into many trading strategies. The flexibility and relative simplicity of pivot points definitely make them a useful addition to your trading toolbox. Working capital is a measure of both a company039s efficiency and its short-term financial health. Working capital is calculated. The Environmental Protection Agency (EPA) was established in December 1970 under United States President Richard Nixon. The. A regulation implemented on Jan. 1, 1994, that decreased and eventually eliminated tariffs to encourage economic activity. A standard against which the performance of a security, mutual fund or investment manager can be measured. Mobile wallet is a virtual wallet that stores payment card information on a mobile device. 1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.4 Common Active Trading Strategies Active trading is the act of buying and selling securities based on short-term movements to profit from the price movements on a short-term stock chart. The mentality associated with an active trading strategy differs from the long-term, buy-and-hold strategy. The buy-and-hold strategy employs a mentality that suggests that price movements over the long term will outweigh the price movements in the short term and, as such, short-term movements should be ignored. Active traders, on the other hand, believe that short-term movements and capturing the market trend are where the profits are made. There are various methods used to accomplish an active-trading strategy, each with appropriate market environments and risks inherent in the strategy. Here are four of the most common types of active trading and the built-in costs of each strategy. (Active trading is a popular strategy for those trying to beat the market average. To learn more, check out How To Outperform The Market .) 1. Day Trading Day trading is perhaps the most well known active-trading style. Its often considered a pseudonym for active trading itself. Day trading, as its name implies, is the method of buying and selling securities within the same day. Positions are closed out within the same day they are taken, and no position is held overnight. Traditionally, day trading is done by professional traders, such as specialists or market makers. However, electronic trading has opened up this practice to novice traders. (For related reading, also see Day Trading Strategies For Beginners .) Some actually consider position trading to be a buy-and-hold strategy and not active trading. However, position trading, when done by an advanced trader, can be a form of active trading. Position trading uses longer term charts - anywhere from daily to monthly - in combination with other methods to determine the trend of the current market direction. This type of trade may last for several days to several weeks and sometimes longer, depending on the trend. Trend traders look for successive higher highs or lower highs to determine the trend of a security. By jumping on and riding the wave, trend traders aim to benefit from both the up and downside of market movements. Trend traders look to determine the direction of the market, but they do not try to forecast any price levels. Typically, trend traders jump on the trend after it has established itself, and when the trend breaks, they usually exit the position. This means that in periods of high market volatility, trend trading is more difficult and its positions are generally reduced. When a trend breaks, swing traders typically get in the game. At the end of a trend, there is usually some price volatility as the new trend tries to establish itself. Swing traders buy or sell as that price volatility sets in. Swing trades are usually held for more than a day but for a shorter time than trend trades. Swing traders often create a set of trading rules based on technical or fundamental analysis these trading rules or algorithms are designed to identify when to buy and sell a security. While a swing-trading algorithm does not have to be exact and predict the peak or valley of a price move, it does need a market that moves in one direction or another. A range-bound or sideways market is a risk for swing traders. (For more on swing trading, see our Introduction To Swing Trading .) 4. Scalping Scalping is one of the quickest strategies employed by active traders. It includes exploiting various price gaps caused by bidask spreads and order flows. The strategy generally works by making the spread or buying at the bid price and selling at the ask price to receive the difference between the two price points. Scalpers attempt to hold their positions for a short period, thus decreasing the risk associated with the strategy. Additionally, a scalper does not try to exploit large moves or move high volumes rather, they try to take advantage of small moves that occur frequently and move smaller volumes more often. Since the level of profits per trade is small, scalpers look for more liquid markets to increase the frequency of their trades. And unlike swing traders, scalpers like quiet markets that arent prone to sudden price movements so they can potentially make the spread repeatedly on the same bidask prices. (To learn more on this active trading strategy, read Scalping: Small Quick Profits Can Add Up . ) Costs Inherent with Trading Strategies Theres a reason active trading strategies were once only employed by professional traders. Not only does having an in-house brokerage house reduce the costs associated with high-frequency trading. but it also ensures a better trade execution. Lower commissions and better execution are two elements that improve the profit potential of the strategies. Significant hardware and software purchases are required to successfully implement these strategies in addition to real-time market data. These costs make successfully implementing and profiting from active trading somewhat prohibitive for the individual trader, although not all together unachievable. Active traders can employ one or many of the aforementioned strategies. However, before deciding on engaging in these strategies, the risks and costs associated with each one need to be explored and considered. (For related reading, also take a look at Risk Management Techniques For Active Traders .) Working capital is a measure of both a company039s efficiency and its short-term financial health. Working capital is calculated. The Environmental Protection Agency (EPA) was established in December 1970 under United States President Richard Nixon. The. A regulation implemented on Jan. 1, 1994, that decreased and eventually eliminated tariffs to encourage economic activity. A standard against which the performance of a security, mutual fund or investment manager can be measured. Mobile wallet is a virtual wallet that stores payment card information on a mobile device. 1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. Option Approval Levels Explained Option level approval is a commonly overlooked area of option trading. When a person opens an account, the broker assigns them one of several option approval levels supposedly based on the option traderrsquos knowledge and needs. In many instances, the students in the Options Trader courses I have recently taught did not know what level of approval they had, and a few students were unaware that the levels even existed. I suggest that anyone who is uncertain of their option approval level contact his or her broker to find out which level of option approval their account has. It is possible to fill out additional paperwork and to have the level of approval bumped up. However, it does to take time to do it. Faxing the paperwork might expedite the process a bit. Usually there are four option approval levels, generally ranked from one to four, the highest rank being the highest level of approval. The higher levels allow the trading of the strategies listed in the lower levels. For instance, Level 3 allows not only for spread trading. but also for going long on calls and puts which were included in Level 2. Thus, each level is cumulative. At any rate, there is no official standard of what strategies could be traded at which level. The table below presents universal industry guidelines in terms of strategies commonly associated with each level. I have also added another column for abbreviation. I usually mark a long position with a plus in parentheses, while for a short position I use a minus sign. Calls are marked by ldquocrdquo and puts by ldquoprdquo. Option Approval Levels At the first option approval level, an option trader is permitted to do covered calls. as well as ldquolong protective puts. rdquo Now there is a catch to it at this level a trader is not allow to buy any calls, but is allowed to buy puts only in the amounts he or she holds, and also only on the specific stock that he or she owns. For instance, if a trader owns 100 shares of a stock, then they could purchase a single put contract and nothing more. By the way, this is generally the only level that most brokerages will approve for IRAs (individual retirement accounts). Option approval level 2 is an incremental improvement over the previous level. At this level, a trader is permitted to perform both strategies listed in Level 1, as well as going long on calls and puts. At this level, one is allowed to perform the outright purchase of a call or put on either optionable stocks, exchange-traded funds (ETFs) or even indices. This level of approval is associated with the word speculation, at least from the brokerrsquos viewpoint. Option approval level 3 involves spreads regardless of whether they are diagonal. horizontal or vertical. However, the same cannot be said for being long or short on a spread. If one is shorting a horizontal spread without sufficient funds in his or her account, the broker would automatically reject that order. Once again, there is limitation on each of these different levels of option approval. Shorting something without ownership belongs to the next level. Option approval level 4 is known as uncovered selling or naked shorting. (I like to use the word ldquoexposedrdquo instead of ldquonaked, rdquo especially when I am talking about spread trading, which involves multiple positions, also known as legs. Occasionally, one of the positions could become uncovered or exposed, so if I say I have a ldquonaked leg, rdquo it does sound odd.) Level 4 is the highest approval level and just about any option strategy could be performed at this level as long as the size of account is to the brokerrsquos liking, which is usually quite large. At this level, short selling is possible, as well as many different types of ratio spreads. Article printed from InvestorPlace Media, investorplace200903option-approval-levels-explained.
No comments:
Post a Comment