Determining at what price level will be the pivot point is one of the most critical aspects of foreign currency trading, no matter what the holding period for the position.
That results from the pivot point being the price level that can be used to calculate estimated support and resistance levels for the trading market for whatever period is desired. It is derived from the previous high, previous low, and the closing price. The pivot point is very useful in the foreign exchange market due to the size of the market. The depth and breadth of the foreign exchange market is a barrier to manipulation, unlike the exchanges for smaller commodity assets.
No matter what the trading style, pivot points should be combined with a variety of technical indicators for a profitable forex strategy. For punters and day traders, pivot points will most likely be based on the immediate term price level or volume. That is particularly true for short term momentum traders. This type of trading, basically speculation, is very risky as markets can turn quickly.
When that happens, punters and day traders will often times double down, thinking an even greater opportunity for profit has developed. A new pivot point will be determined based on the recent development. If this transpires during a swing in the market from a new trend developing, the day trader or punter will suffer heavy losses. That is why study and study shows that more than 80% of active traders such as punters and day traders lose money.
For those looking to profit from the long term trends as their forex strategy, pivot points are very useful. As buying and selling is not done on a frequent basis, the pivot points are valuable for determining a fundamental swing in the market with concomitant profits for those adjusting to the new trends. This points time on the side of the forex strategy being utilized.
In her book, “Hedge Hunters,” Katherine Burton pointed out that the top asset managers were only right about 55 to 60 percent of the time. What allowed for the billions to made in buying and selling foreign currencies and other asset classes was the ability to determine which position was profitable and which was not. Selling the losers quickly and letting the winners further develop into even greater levels of profitability is what resulted in million- and billion-dollar bonuses for the managers of the fund.
Pivot points can add greatly to the gains of a long term forex strategy. Combined with the desired technical indicators, pivot points can establish the new pricing level. Based on the direction, volume and other metrics, profits can be registered from long or short positions in the forex markets utilizing pivot points.