FOREX BASICS
Understanding Pivot Points
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clock 12:37

Understanding Pivot Points

Pivot points are extremely popular with traders, they are used to spot direction, probable reversal points and potential support and resistance levels. It’s a well-known tool that is of particular interest to novice traders, due to the simplicity of the mathematical formulas it incorporates. In the past, pivot point calculations were used on daily, weekly and monthly timeframes. These days, new technology means we can calculate pivot points on smaller timeframes too. Pivot points use the previous period’s open, close, high and low prices to calculate the current period’s direction and future support and resistance levels. Formula To identify possible turning points on current candlesticks, a pivot point calculation uses the formula below: Resistance 3 = High + 2*(PP – Low) Resistance 2 = PP + High – Low Resistance 1 = 2*PP – LowPivot Point(PP) = (High + Low + Close) / 3 Support 1 = 2*PP – High Support 2 = PP – (High – Low) Support 3 = Low – 2*(High-PP) After the main pivot point is calculated using the most recent candlestick’s typical price ((High + Low + Close) / 3), you can work out possible support and resistance levels. The pivot point, in combination with the support and resistance levels, is an intraday trader’s ‘guide’ to the financial markets. The concept states that, when prices float above the defined pivot point, the market is moving in a bullish direction and is likely to continue moving in an upwards direction, and vice versa. When the prices go below the pivot point, then the market is bearish and prices will probably move towards a downward direction. Trading Pivot Points Long positions opened above the pivot point can potentially meet resistance (R1-resistance level 1), which opens an opportunity for day-traders to lock in potential profits. A strong upwards surge above R1, could potentially open the path to more profit opportunities at higher resistance levels (R2 and R3). A protective stop-loss below the pivot point is recommended to avoid losses in case of unexpected volatility. In the same way, short positions opened below the pivot point can potentially meet support (S1 – support level 1), opening the path for day traders to lock in potential profits. A strong downwards surge below S1 could can potentially lead to additional profit opportunities at lower support levels (S2 and S3). A protective stop-loss above the pivot point is recommended to avoid additional loses, in case of unexpected volatility. Sideways movements are confined between the pivot point and R1, which are potential buying and selling opportunities for range traders, when prices bounce off the pivot point and rebound back from R1. In case of a breakout above R1, prices could potentially be driven towards R2, and the pivot point will serve as support and vice versa. If a breakout below the pivot point occurs, then prices can potentially drop further towards S1 and the pivot point will act as resistance. Additionally, if prices are under the pivot point they may meet support at S1 and bounce back up towards the pivot point. When prices are confined between the pivot point and S1, also known as a range, potential trading opportunities can occur for buyers when prices bounce off S1 and for sellers when prices bounce back from the pivot point. Techniques In total, there are five pivot point techniques used for calculation – including the Standard technique which is the most popular. 1. Standard. 2. Fibonacci. 3. DeMark’s. 4. Woodie’s. 5. Camarilla. All techniques, apart from the DeMark formula, use the previous period’s high, low and close prices to calculate the pivot point. The DeMark formula uses the relationship between the open and close price, to define one of the three formulas that will be used to calculate X in the appropriate pivot point calculation. In addition, Camarilla uses the current period’s open price in the pivot point calculation. Pivot point calculation techniques vary in terms of the weight assigned to each pivot point level. These are pivot point, support and resistance, and the distance between each pivot point. Conclusion The reason pivot points are still some of the most valuable tools in forex trading is because they provide a simple way of understanding which direction the market is heading in. Markets are bullish when prices are above the pivot point and bearish when prices are below. This tool allows the trader to easily calculate potential support and resistance levels, where prices may halt before continuing to trade sideways, or break above or below a range depending on the supply or demand. However, just like with any technical analysis tool, in order to give your trading strategy the best potential, pivot points should be combined with other indicators/oscillators and candlestick reversal patterns for extra confirmation. Put your knowledge into practice with our demo forex trading account. Return to Articles Ebooks Glossary Videos Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same. Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.
Harmonic Patterns: AB=CD
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clock 12:22

Harmonic Patterns: AB=CD

Since the introduction of harmonic patterns in Harold M. Gartley’s 1935 book, Profits in the Stock Market, a lot has changed. So it’s inevitable that the original Gartley 222 pattern would undergo some developments as well – after all, the only thing that remains constant is change. Browsing the internet, one comes across many different variations of the original harmonic pattern. What these patterns have in common is the adoption of Fibonacci ratios as a prerequisite. The AB=CD Pattern One of the authors on the subject, Scott M. Carney, refined the pattern by assigning new elements and specific Fibonacci ratios to confirm the formation. The result is what is known today as the AB=CD pattern. The Perfect Bullish AB=CD Pattern When the structure conforms to the following specifications, then it qualifies as a perfect bullish AB=CD pattern. The specifications are the following: AB=CD BC retraces 0.618 of AB CD terminates at the 1.618 projection of BC Equal time of duration for AB and CD Even though time is not the most reliable factor in technical analysis, it is nevertheless an element of the unique specifications of the perfect AB=CD pattern. One way to measure the time required for each leg (i.e. AB, CD) to complete is to simply count the corresponding candlesticks that comprise each of the legs. The Perfect Bearish AB=CD Pattern Similarly, the same rules apply when identifying the perfect bearish AB=CD pattern: AB=CD BC retraces 0.618 of AB CD terminates at the 1.618 projection of BC Equal time of duration for AB and CD If we take a closer look at a real price chart, we can clearly see that the example below qualifies as a perfect bearish AB=CD pattern. Point D is defined by the completion of the CD leg that satisfies the condition AB=CD. Also, notice the Potential Reversal Zone which fulfils both required conditions: 161.8 projection of BC and AB=CD. The Reversal Bar, also known as the Terminal Price Bar, tested both lines (161.8 of BC and AB=CD). The only condition that came close, but is not 100% fulfilled, is the time factor. The leg CD took more time to form compared to leg AB. It should be emphasised again that time is not a very reliable factor. Here is another example of a real price chart; this time showing a bullish AB=CD pattern. Again, all conditions are met, with the exception of the time factor. The CD leg required much more time to complete compared to the AB leg, as this was of a considerably shorter time duration. Trading the AB=CD Pattern Trading the AB=CD pattern involves rules for entering the trade, locking potential profits and exiting with minimum loss if the market follows the opposite direction. The entry in the trade, whether buy or sell, is triggered once the pattern is in place. In the following chart, the completion of the pattern takes place at point D, where AB=CD. Furthermore, the 161.8 projection of BC along with point D define the Potential Reversal Zone. In this case, the Terminal Price Bar hammer-tested both point D and the 161.8 projection of BC. The existence of the hammer at the end of the pattern signals the end of the bearish move and the beginning of a new move to the upside. This is your buy entry.  As no trade is 100% guaranteed to be profitable, it makes sense to place a protective stop loss below the Potential Reversal Zone. After all, the word ‘potential’ implies that the pattern may reverse to the upside or continue following the prevailing trend. If the latter takes place, then the pattern will be invalidated and the buy position will need to be exited. Take profit is more subjective as it offers different options. An initial profit, usually 50% of the position, may be booked at the 0.618 mark between the high (point A) and the low (point D) of the pattern. The remainder may be booked using a 0.382 trailing stop or trendline violations. Conclusion Harmonic patterns have gained a lot of momentum lately. Since their appearance in 1935, many patterns have undergone some refinement. The inclusion of Fibonacci ratios and projections have added more detail to the specifications. This was one of the primary goals of this article — to shed some light on the perfect AB=CD pattern. More articles will follow, and the rest of the harmonic patterns will be unveiled. Learn to trade with FXTM Discover how to make the right trading decisions for your style and goals with our comprehensive range of educational resources. Learn from home when and how it suits you with our educational videos or sign up for a remote webinar. We also host on-location, interactive forex seminars and workshops around the world – there might be one coming to your area soon! Put your knowledge into practice with our demo forex trading account. Return to Articles Ebooks Glossary Videos Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same. Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.