Pivot Points (forex)

Foreign exchange market
A Pivot points, a technique developed by floor traders, help us see where the price is relative to previous market action.
As a definition, a pivot point is a turning point or condition. The same applies to the Forex market, the pivot point is a level in which the sentiment of the market changes from 'bull' to 'bear' or vice versa. If the market breaks this level up, then the sentiment is said to be a bull market and it is likely to continue its way up, on the other hand, if the market breaks this level down, then the sentiment is bear, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price can't break the pivot point, a possible bounce from it is plausible. Raul Lopez explains in an article published in 2006.
Why PP work?
They work simply because many individual traders and investors use and trust them, as well as bank and institutional traders. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.

Calculating pivot points
There are several ways to arrive to the Pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session).

Pivot point (PP) = (High + Low + Close) / 3

Take for instance the following EUR/USD information from the previous session:

Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458

The PP would be,
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439

What does this number tell us?
It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. On both cases this condition is likely to sustain until the next session.

Since the Forex market is a 24hr market (no close or open from day to day) there is a eternal battle on deciding at white time we should take the open, close, high and low from each session. From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT.

Besides the calculation of the PP, there are other support and resistance levels that are calculated taking the PP as a reference.

Support 1 (S1) = (PP * 2) – H
Resistance 1 (R1) = (PP * 2) - L
Support 2 (S2) = PP – (R1 – S1)
Resistance 2 (R2) = PP + (R1 – S1)

Where, H is the High of the previous period and L is the low of the previous period

Continuing with the example above, PP = 1.2439

S1 = (1.2439 * 2) - 1.2474 = 1.2404
R1 = (1.2439 * 2) – 1.2376 = 1.2502
R2 = 1.2439 + (1.2636 – 1.2537) = 1.2537
S2 = 1.2439 – (1.2636 – 1.2537) = 1.2537

These levels are supposed to mark support and resistance levels for the current session.

On the example above, the PP was calculated using information of the previous session (previous day.) This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point in a weekly or monthly basis is mostly used by long term traders, but it can also be used by short time traders, it gives us a good idea about the longer term trend.

S1, S2, R1 AND R2...? An Objective Alternative
As already stated, the pivot point zone is a well-known technique and it works simply because many traders and investors use and trust it. But what about the other support and resistance zones (S1, S2, R1 and R2,) to forecast a support or resistance level with some mathematical formula is somehow subjective. It is hard to rely on them blindly just because the formula popped out that level. For this reason, we have created an alternative way to map our time frame, simpler but more objective and effective.

We calculate the pivot point as showed before. But our support and resistance levels are drawn in a different way. We take the previous session high and low, and draw those levels on today’s chart. The same is done with the session before the previous session. So, we will have our PP and four more important levels drawn in our chart.

LOPS1, low of the previous session.
HOPS1, high of the previous session.
LOPS2, low of the session before the previous session.
HOPS2, high of the session before the previous session.
PP, pivot point.

These levels will tell us the strength of the market at any given moment. If the market is trading above the PP, then the market is considered in a possible uptrend. If the market is trading above HOPS1 or HOPS2, then the market is in an uptrend, and we only take long positions. If the market is trading below the PP then the market is considered in a possible downtrend. If the market is trading below LOPS1 or LOPS2, then the market is in a downtrend, and we should only consider short trades.

The psychology behind this approach is simple. We know that for some reason the market stopped there from going higher/lower the previous session, or the session before that. We don’t know the reason, and we don’t need to know it. We only know the fact: the market reversed at that level. We also know that traders and investors have memories, they do remember that the price stopped there before, and the odds are that the market reverses from there again (maybe because the same reason, and maybe not) or at least find some support or resistance at these levels.
What is important about his approach is that support and resistance levels are measured objectively; they aren’t just a level derived from a mathematical formula, the price reversed there before so these levels have a higher probability of being effective.
Our mapping method works on both market conditions, when trending and on sideways conditions. In a trending market, it helps us determine the strength of the trend and combined with price behavior helps us trade off important levels. On sideways markets it shows us possible reversal levels. It also helps us to set the Risk Reward ratio based on where is the market relative to previous market action.

Fibonacci

about Forex Fibonacci
Leonardo Fibonacci explained the exponential growth in nature through a well-known number sequence. In this sequence each number is the sum of the previous two consecutive numbers.
The sequence starts with 0 and 1 and goes on with: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, etc.
bonacci proved that this sequence can be manifested in the evolution of a natural growth phenomenon, as a solution to a mathematical problem based on the reproduction process of a pair of rabbits. However, the utility of the sequence lies in its fundamental properties, discovered in the eighteenth century:

1. When dividing the consecutive numbers of the sequence, ie: 1/1, 1/2, 2/3, 3/5, 5/8, 8/13, etc., the result tends to approach the number 0,618.

2. When dividing the non-consecutive numbers of the sequence, ie, 1/2, 1/3, 2/5 3/8, 5/13, 8/21, etc., the result is the number 0,382.

3. The ratio of any number of the sequence in relation to the next lowest number, ie: 21/13, 13/8, 8/5, tends to be 1,618.

4. The ratio of any number of the sequence in relation to the next lowest non-consecutive number, ie: 21/8, 13/5, 8/3, tends to be 2,618.

The difference between the ratios and the result of the equation is greater when the the numbers used in the series are smaller. For example:

144/233 = 0,618: the result of the equation is a precise Fibonacci ratio.
144/89= 1.6179: with a smaller number the result of the equation only comes close to the Fibonacci ratio.

The 1,618 ratio and its inverse, the 0,618, were called by the ancient Greeks the 'golden ratio'.

Traders are not so interested in the numbers of the sequence as in the ratios between the numbers. These ratios can be used to identify support or resistance levels, find the targets for price movements, or even to determine the time period that a movement will last.

The most popular levels or ratios are:23.6%, 38.2%, 61.8% and 161,8%.
The 100% which is the full size of the movement to be analyzed and its half, the 50%, are commonly added to the Fibonacci levels, although they are not ratios of the sequence.

It's common to see a price correction towards a Fibonacci level after a clear trend has been developing. This doesn't mean that a price correction is to halt accurately at these levels, but most of the time price will slow down or interrupt the directional move and find temporary support and resistance at a Fibonacci level.

In this daily USD/CHF chart, the Fibonacci tool is anchored in the extremes of a trend that lasted about a month in late 2006. For nearly a year, prices were consolidated at the 23.6%, 38.2%; 61.8% levels. The 50% level has been omitted here for more clarity, but we encourage you to include it in your toolbox.

in the next chart, the anchorages of the Fibonacci tool were moved when the price reached new highs and lows. Observe how the old consolidation levels are mostly coinciding with the new levels, despite the fact they are dislocating the tool.

In the next chart, the upper anchorage is simply displaced in time but remains at the same price level. In contrast, the lower anchor has been placed at the new low reached by the price. Again, observe how the price takes into account the new Fibonacci levels.

By moving the tool to the newest extremes, we are also segmenting the chart into smaller sections, which in turn can be used as entry or exit points, or just as levels to adjust a trade size.

MACD divergences

about MACD (forex)
One of the things traders look for are signs of convergence and divergence between price action and the indicator. A convergence is when the indicator and the price action are hinting a similar signal and, therefore, reinforcing their signals. But when the indicator and the price are telling a different story, there is a divergence, showing that price is not supported by the indicator.
There are basically four types of divergences, which can be identified with the MACD or any other oscillator (Stochastic, Momentum, RSI, etc.). Divergences, like its name suggests, happen when the price and the oscillator go in opposite directions, hence diverging from each other.

The four types of divergences are:
A regular divergence simply means one of two things - that price has made higher highs while the oscillator has made lower highs (this is the case of a regular bearish divergence), or that price has made lower lows while the oscillator has made a higher low (a bullish divergence).
A regular bearish divergence is a sign that an upside momentum may be failing and that there may be an impending downturn, while a bullish divergence, on the other hand, is a sign that downside momentum may be exhausted and may be interpreted as a warning of weakness of the trend.
Hidden divergences, in turn, are signs of trend strengthening: when price has made a higher low while the oscillator has made a lower lows (this is the case of a hidden bullish divergence), or that price has made lower highs while the oscillator has made a higher high (a bearish hidden divergence).
The MACD histogram, which is the difference between both MACD lines, can also be used to confirm MACD divergences. As such, if it is divergent to price, it can suggest the move is running out of steam. fxstreet.com

MACD (2)

MACD consolidation
...When a currency pair is volatile, all elements of the MACD show broad movements on both sides of the median line. However, when the market is calm, moving averages converge and the MACD lines consolidate as well.
These feature make the MACD indicator useful to measure volatility and market sentiment. Notice how each volatility boost starts after a period of consolidation.
The MACD indicator is an open indicator which means that overbought and oversold conditions are relative to previous highs and lows of the MACD line.
Being an open indicator implies that, unlike other oscillators with values ranging from 0% to 100%, in the MACD there is no maximum or minimum value. Since the EMAs forming MACD can't theoretically distance from each other ad infinitum, there is logically always a return of the lines towards the median line. To identify periods of overbought and oversold conditions, we must look at past figures in the range of values which the MACD has registered.
Technical indicators work particularly well when combined with each other. Besides, they also perform well with different settings than the default ones. A proof of it is the below illustration.

A 200 SMA has been displayed on the chart, combined with a MACD using the following settings: 21, 55, 8. You may ask again where these weird numbers are coming from. The answer is they belong to the Fibonacci sequence. The next section will cover the sequence in more detail, but for now just observe how an ascending 200 SMA acted as a filter for the signals generated by the MACD crossovers. The purpose was to go with the trend, therefore no bearish cross was taken as valid.Do you conceive the MACD or even moving average crossovers as the only way to determine the overall trend in your analysis? It's true these are great methods, but they always produce series of losses, specially when the market is consolidating.

There is another method which enables traders to profit from consolidation periods, and this is done by identifying divergences between price and the MACD lines.

One of the things traders look for are signs of convergence and divergence between price action and the indicator. A convergence is when the indicator and the price action are hinting a similar signal and, therefore, reinforcing their signals. But when the indicator and the price are telling a different story, there is a divergence, showing that price is not supported by the indicator.

There are basically four types of divergences, which can be identified with the MACD or any other oscillator (Stochastic, Momentum, RSI, etc.). Divergences, like its name suggests, happen when the price and the oscillator go in opposite directions, hence diverging from each other.

MACD

Learn Techical analysis ( MACD) forex Market:
MACD may be interpreted similarly to other moving averages and used as a trend-following indicator. That is, when the MACD crosses above the MACD signal line, it's a bullish signal, and conversely, when the MACD crosses below the MACD signal line, a downtrend may be beginning and the signal is bearish.
Its default settings are usually 26, 12, 9 and its components are:
1. The MACD line which takes a short length and a long length exponential moving average (defaulted to 12 and 26) and calculates the difference between these two averages.
2. A signal line which is then derived by calculating an exponential moving average of the MACD line. This is plotted as the MACD signal.
3. The third element is the median line also called 'zero line' or 'center line'.
The MACD moves around a center line and it has not upper or lower limits as other oscillators have. It is thus called an 'open oscillator'. The median line represents the point at which the moving averages are equal.
If the EMAs which compose the MACD cross a bearish signal, the indicator translates it into a simultaneous bearish crossing of the MACD line with its median line. And vice versa, when the MACD line crosses its median line to the upside, this means the two EMAs built in the indicator are crossing upwards.
4. Finally, the difference between the MACD and the MACD signal line is calculated and plotted in a histogram.


If you are going to use the MACD, don't exclude the histogram. On occasion, the MACD itself may be following the price nicely, but the histogram can alert the trained analyst that a turn in price is in the air by giving signs of divergence. What a divergence is will be explained further below.

The same dilemma as for the moving averages applies for the MACD: shorter moving averages will be more sensitive and generate more crosses, and longer moving averages will always lag price and generate fewer signals.
Why then not change its default settings and do something creative with the MACD? The signals provided with the settings 36,81,18 may be few, but are they therefore less reliable? Note how the below settings evidence the start of a trend when the MACD line crossover is close to its median line. You may ask where this weird numbers are coming from. The answer is that they are multiples of 9.
The MACD is based on the concept of convergence-divergence. But what is the convergence-divergence of a moving average? We have said the MACD consists of two exponential moving averages that range around the median line. The result is an indicator that oscillates above and below that line.

When the MACD is above the median line, this means the 12-period moving average is above the 26-period moving average, indicating that recent prices are higher than the previous ones.
Conversely, when the MACD is below the median line, it means the 12-period moving average has a value of less than 26 periods, indicating that prices are falling.
In other words, the bigger the spread between the two EMAs taken into the equation of the MACD line is, the more distance the indicator will print to its median line.
When a currency pair is volatile, all elements of the MACD show broad movements on both sides of the median line. However, when the market is calm, moving averages converge and the MACD lines consolidate as well.
These feature make the MACD indicator useful to measure volatility and market sentiment. Notice how each volatility boost starts after a period of consolidation. fxstreet.com

Technical Indicators

The indicators we are going to start with are moving averages, which fall under the category of trend indicators and basically serve to smooth historical price data and to create a composite of market direction.

We'll then move on to study several uses of the MACD, which is an oscillator. Oscillators determine the strength or weakness of a trend as it progresses over time, and they offer many ways in which they can be used: to spot divergences between the price and the indicator, to reveal overbought and oversold market conditions and to print crossovers. And this is just to name the most common uses. Other well known oscillators are the Stochastic and the RSI which are mentioned in a later section.

Indicators based on price levels, like Fibonacci levels and Pivot Points, are our next study. The advantage of these indicators is that they don't lag price and work very well in combination with other indicators. Besides, they are excellent visualizers of S&R levels.

Another category belongs to the volatility indicators. Volatility is a general term used to describe the dimension of price fluctuations independently from the direction of the trend. Bollinger Bands are a good example and deserve to be rescued later on when covering trading strategies in the next Unit of the Learning Center.
There is no reason to complicate things when learning technical analysis. That is the reason why we will study only a few common indicators, but in turn we will study their nature and see what implementations and parameters make them more effective.
You don't need to devote your time collecting price data to make use of technical indicators. Any private trader can access numerous technical tools through most trading platforms.

Drawbacks of technical analysis

Despite the fact it represents a true edge for the trader, technical analysis presents some disadvantages. Those who oppose technical analysis point out several problems related to the application of its methods.
1. The failure to know the underlying fundamentals.
A common argument is that technical analysis is aimed at predicting a certain outcome for a chart pattern, ignoring the reasons of the movements which are due to fundamental factors. This is an obvious limitation of technical analysis and any trader feeling uncomfortable with this handicap should find support in the next chapter dedicated to fundamental analysis.

2. The lack of scientific objectivity.
Although some technical methods offer a certain objectivity to the chart analysis, other elements of technical analysis may not necessarily lead to an objective interpretation. That is why technical analysis is sometimes referred to as being more an art than a science. It is also where individual biases can come into play.

In the previous unit, we talked about the self-fulfilling prophecy referring to the fact that the more people approaching markets with technical analytical methods, the more likely the expected move in price occurs. It's another typical argument that points out the lack of a proven thesis. The fact that traders operate with different time horizons and with many different reasons besides making money makes it difficult to find a common approach to the self-fulfilling prophecy.

3. The uniqueness of the pattern occurrences.
Another legitimate argument in favor of the unreliability of technical analysis is based on the true observation that past price action upon which technical methods are based does not often repeat exactly the same way. This can lead to incongruities in the analysis and to inconsistency in the methods.

At this point, however, you should ask yourself whether these arguments can be dealt with in order to make money in the markets. Of course they can, and we are going to show you how!

It's true that traders will never be 100% correct when using any strategy based on technicals. However, more often than not technical studies do create a positive expectancy. You don't need much more than that.
A valuable lesson is undoubtedly that analysis doesn't make the whole trading plan. A proper money management and a trained attitude to stick to the rules are elements which offer additional edges to include in the trading plan. Therefore, don't worry excessively about the above mentioned drawbacks - technical traders have learned how to deal with them. 1, 2 next

Purpose of Technical Analysis

The purpose of technical analysis is to carry out price forecasts. By processing historical market data of any instrument, you can try to anticipate how it should be traded. There are several premises in favor of the reliability of technical analysis that are based on the experience and prolonged observation. These premises are the following:

1. A market trend in motion is more likely to persist than to reverse.
This is obvious by simply looking at any Forex chart. Of course the aim of any trader is to be aware of the overall market direction, to lock into the prevailing trend and trade it for profit.

2. Market discounts all fundamentals by displaying them quickly in the price action.
In other words, technical analysts assume that market fundamentals are already represented in the price so what you perceive in the charts is a reflection on any fundamental variable impacting the market. Nowadays, with instant communications this is truer than ever.

Either the unidirectional price move during a trend or the rapid reaction to any new fundamental data throws evidence that markets show up human behavior. From the above premises we can derive that human psychology is always at work in the markets and that technical analysis aims to visualize and quantify it.
3. What has happened in the past will happen again.
This third premise is based on the assumption that human behavior as well as human psychology never change, and that price will reflect it through the repeated emergence of certain price action patterns and trends.
Price action, as a result of human decision making, can be thus considered as being purposeful. Although some people believe that price movement is completely random and unpredictable, technical analysts are always prone to identify and quantify those behavior patterns by examining past markets. While markets are unpredictable in essence, market participants are typically considered to adhere to certain habits, which are rarely broken. As a trader, your goal is to make use of this information in order to gain a slight advantage over the eventual unpredictability of the market. 1, next

Technical analysis | 1

Technical analysis helps you to organize the overall market picture while it lays the path to rule based trading. Having a technical approach will be very important, specially during your first attempts to develop a personal trading style.

There are a lot of ways to analyze market information through technicals and the potential variables are endless. Understanding how to wade through this data is vital at this stage. We will therefore not present you a technical analysis manual but rather insist on the flexibility of a few common indicators and the roles they can play in a trading system. This practical approach will prepare you for the more advanced Units of the Learning Center.
Technical analysis offers the ability to do some things not easily achieved otherwise. That is the reason why many traders include it among their trading tools arsenal. But still many aspiring traders don't fully understand the advantages of technical analysis - and refuse to differentiate between analysis and the other components of a trading plan such as money management and trade execution.
In its essence, a Forex price chart is a simple sequence of up and down pips forming visual patterns. Technical analysis aims to identify these patterns and measure their outcome in terms of probabilities. However, the repeated occurrence of such patterns would imply a certain consistency of the outcomes. But in reality, there is no absolute consistency as each pattern is somehow unique - even if it has some similarities with other patterns.
This underlying dilemma will be present along this chapter and many ideas about how to deal with it will be disclosed..fxstreet.com
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