Forex trading implies not only trading operations, but also a thorough study of market behavior. This is what allows us to predict changes in the trading situation in the short or long term. There are various methods of market analysis used in Forex. And within the framework of their application, in some cases it is possible to reveal stable interrelations between changes in charting and market movements. One of such indicators is the “reversal points” – indicators of the chart, which clearly signal about the imminent change of trend.
Pivot points: levels
What is the so-called turning point? This is the price level, the approach to which or its achievement demonstrates the lack of readiness of the market in the continuation of the current trend. Simply put, with upward and downward trends, there are support levels, and the reversal point will be the boundary of this level, beyond which the market is unlikely to be able to go. In an upward trend (with a resistance level), the development of events in the formation of the pivot point may be as follows:
– the price movement will become horizontal, with minor fluctuations within the established price corridor);
– the market will begin to show short-term or steady dynamics on the rate reversal, reacting to the formation of the turning point by the price drop.
The market with a pronounced downward trend reacts to the formation of a reversal point mirrorwise – the formation of the support level and the transition of the market in the position of the flat or the price reversal in the direction of the positive dynamics of the new trend.
Methods for calculating market reversal points
Traditionally, the pivot point on a chart is searched for:
- building graphical models;
- the Japanese candlestick method;
- calculation based on “days of exhaustion”;
- using various market indicators.
Let’s consider each of the methods in more detail.
1) Building graphical models
Any graphical model is based on the support/resistance levels, the breakdown of which signals the impending change in the market situation. But even this signal can be stronger or less significant – depending on the scheme of price movement.
In fact, the most reliable is the graphical model known as “Butterfly Gartley” – it is it that most clearly signals the upcoming market reversal in an upward or downward trend. This figure is distinguished by a special shape – in the form of butterfly wings, where the extreme points of the “wing” are the minimum or maximum drop / rise in price. The second part of the diagram will show a certain proportion to the level of price fluctuations of the first one.
Trading at pivot points in this case can be based on simply placing short or long positions within the predicted trend movement. Or you can use these reversal points to trade after the market movement – buying at the pullbacks of the price and selling at its ups and downs, based on the predicted short-term changes in the market.
Also relevant for determining the market reversal points are such shapes as “Head and Shoulders” and “Double Top and Double Top and Double Top/Triple Top and Triple bottom”.
2) Japanese candles
There are quite a few combinations of Japanese candlesticks, one way or another, signalling the formation of trends to the market reversal. These include such extreme models as “Hammer” and “Hanged” – candlesticks with no shadow at the top or bottom, depending on the market trend. The appearance of these candlestick models on the chart is an obvious signal, which can be missed if you make a mistake during further forecasting of the situation.
3) “Days of exhaustion” candlesticks
This market reversal indicator usually looks like a candlestick with a disproportionately long body and a long “tail” directed along the trend. The confirmation of this signal is the subsequent rollback of price values on the chart.
4) Other market indicators undoubtedly have the right to exist, but their reliability requires additional confirmation in the form of other signals.
Pivot Points – calculate the turnaround level
The pivot points trading tactics provides for the application of the exact formula of its detection on the chart. To obtain the data, a formula where the beer will be equal should be applied: (high+low+close)/3. Where close is the closing price of the previous trading day, low is the price minimum of the previous trading day, and high is the price maximum of the previous trading day.
Based on these calculations, support/resistance levels are also calculated. Okay, they use formulas:
– double value of the pivot point – minimum price (low) = support level R1;
– double value of the pivot point – maximum price (high) = resistance level S1;
– Beer (pivot point) + (R1-S1)=R2;
– beer – (R1-S1)=S2;
– low – 2*(high-pivot)=S3.
By obtaining data on the location of support/resistance levels and market reversal points, you can achieve higher accuracy in making short-term forecasts.
Trading at turning points
After building resistance and support levels on the chart, the trader should wait until the trading situation leads to the formation of breakdowns of levels in one direction or another, depending on the direction of the trend.
It is important to note that the standard time period for calculating pivot points is 24 hours. But, in some cases, this period can be reduced or increased.
How to define the points to start (enter the market) and finish trading? When a situation arises when the market has outlined a reversal trend, the signal for entry/exit is oversold or overbought.
If Fibonacci levels are used as an indicator, their coincidence with the pivot point also indicates the formation of a favorable situation for buying/selling assets.
It is not to be expected that within one trading day the price dynamics will show large-scale fluctuations – usually it is kept within the first resistance/support lines, and for a more global price movement it takes much longer – two or three days, during which the second and third levels will be gradually reached. Other market dynamics indicate that the market is unprepared for major changes.