Forex Trading Mistakes - Not Being Aware of Humane Nature

 So far, we have learned that trading should be undertaken similarly to any other business. There are losses as in any other business (like inventories not sold), but at the same time, it is also important to understand that trading itself is like no other endeavor. Some attitudes that could have given great results in any other task in life could have disastrous effects when it comes to trading. Some of them are listed below.

Fight! Till the End

Since we were kids, we are all taught to fight as hard as we could and do everything in our hands to achieve the desired results or get what we want.

When it comes to trading, the results could be far different. This is commonly named in the trading environment as “marrying one position”. Once you enter a position, you are convinced that it is a winner. Just as you got in, the trade goes against you and you might think “it has got to go somewhere first”. As it keeps going against you, you are still convinced that the trade is going to be a winner. Then you will probably think “operators or money makers are trying to scare us”. As your trade keeps going against you will keep telling yourself “hold it, hold it”. Then you realize the trade has gone too far. This makes it hard to take the loss, and you will probably say “I will wait to get break even, it probably wasn’t a good trade after all”. And the next thing you know is boom! Margin call....

The best thing to do in order to avoid this happening to us is to follow our trading system. Remember, the first time you violate your rules, could also be the last time you trade.

Trial and Error

This is a common practice in many tasks of life. And often it is the only way to get the desired results. Like in the scientific arena in some of the most important findings, scientists actually weren’t looking for what they found. It was the result of trial and error.

In the trading environment, doing this in a real account, will lead you to wipe out your trading funds. You cannot start trading your real account trying different indicators, patterns or systems to see if it gives you the results you are looking for, or if the system fits you.

You need to find what systems/indicators suit you before and not after you start trading your real account.

100%

Since kids, we were taught that we should try as hard as we could to achieve an A or an A+ (100 or 90%) on our grades. Getting those results was proof that we understood any given subject. And of course some of us got a little present as an incentive to keep trying hard.

In the trading environment, this could give us the wrong idea that having a system that is right 70% of the time is an average system, when in fact is an excellent system.

This kind of thinking could lead us to an eternal search for more accurate systems (the aforementioned Holy Grail).

FACT - These kinds of attitudes might make perfect sense in any other endeavor but they complicate our trading careers. For this reason, we need to open our minds to every possibility, even if it doesn't make sense in other areas.

Success in Forex = Learning + Practicing + Update Knowledge

Forex Trading Mistakes, Lack of Discipline

Discipline is a very broad word when it comes to trading. But it all comes down to one sentence, if you have the discipline required to be a good trader, your chances of success in this business will get higher, if you don't, you need to work on it so you could reach your trading goals.

It requires discipline to develop your trading system. Most of us are eager to enter a trade when it all begins. But if you don't develop the guidelines to follow on each trade, I am afraid the trading adventure will end sooner than you think. It requires time, effort and hard work to develop the system.

It requires discipline to follow your trading system. As stated before, there are no better decisions than those made by following your system. Take for instance the following scenarios:

1. You followed your system and made a winning trade.

OUTCOME: You will gain confidence in yourself and your system

2. You followed the system and lost the trade.

OUTCOME: Losses are unavoidable, you followed you system and it will give you confidence in yourself, because you know losses are part of this business.

3. You took a trade with no signal from your system and lost.

OUTCOME: You made a mistake and it turned out as a negative experience. You will now think it twice before entering the market with no signal.

4. You didn’t follow your system and didn’t take a signaled trade that turned out a winning transaction.

OUTCOME: Confidence in yourself will drop substantially.

As you can see here, mistakes are to be valued in terms of the decision made, not in terms of the money made or lost. We will develop more on this later on.

Discipline is also required when it comes to your working environment. To establish your working hours, to organize yourself, etc.

FACT - Discipline is a must in the Forex business. We will elaborate further on this subject in the following lessons.

Success in Forex = Learning + Practicing + Update Knowledge

Forex Trading, Not Using Money Management

 Money Management (MM) is one of the essential parts of trading. The main purpose of MM is to avoid the risk of ruin. The lack of using MM is one of the reasons most traders lose their trading accounts.

MM basically answers the next question: how much to risk on each individual trade? It should not be confused with risk and trade management (pyramiding, scaling out, trailing stops, where to place stops, etc.) MM tells you how big or what size the next trade should be. 

Most traders just focus on the profit side of each trade and totally forget about the risk side. In other words, they think the trade is a winner before placing it, and therefore they do not pay any attention to the consequences a losing trade could produce on your trading account. But remember, every trade is statistically independent from each other. Although the outcome of a series of trades is predictable, there is no possible way to forecast the outcome of each individual trade.

The best systems available are only right around 60 or 70% of the time. For every 10 trades, there is a possibility to have 3 or 4 losing trades. If we don't pay attention to these 3 or 4 trades, we could end up losing month after month, or worse yet, blowing up (losing) our entire account.

We will never know which trade will be a winner and which one a loser, never. So MM should be applied in every single trade, regardless of what you think the outcome of the trade will be.

Even with a system that is right 90% of the time, you could end up broke if you do not apply a sound money management technique.

MM also helps us in the winning side of every trade, when applying MM techniques we could benefit from the geometric growth of our trading account. As your account grows, you will trade larger amounts according to the MM technique applied.

FACT - If you do not have a system that is right 100% of the time you should us Money Management (meaning you should use it because such a system does not exist), regardless of how big or small your trading account is. We will never know the outcome of the next trade, and this one trade could be the last one if you do not apply MM. using MM is not an option, it is a must if you want to achieve your trading goals. You need to do whatever you need to do to be able to trade the next day, week, or year.

If you want to be in this business for the long haul, apply proper trading sizing techniques.

Success in Forex = Learning + Practicing + Update Knowledge

Forex Trading, Not Having a System

 Some traders make trading decisions without any methodology or system. Imagine yourself on a trip in which you intend to drive to the west coast. If you don't study the route to take, where to rest, or you don't even know what cities or villages you are going to pass by, you will probably end up in the east coast, or on the north border, but most importantly you won’t know in the middle of your adventure if you are on the right path. On the other hand, if you know the route to take, villages and cities you are going to pass by, you will know you did something wrong should you drive into an unknown village. At this point, you will review your route, turn around and get on the right route.

The same goes for trading, if you do not use a system or methodology you won’t know what you are doing wrong until it is too late and your trading account is in great danger.

You cannot get into a trade because you think or believe the price is going to go up or down. You need a plan of action, a trading plan that will get you in and will guide you through each trade.

Imagine a trader at the end of the month; her trading account is up, the best month ever. Then she decides to go back and review all the trades made during that month. When looking at the trades she realizes there is no possible way to replicate those results because all of them were entered without any system what so ever, in a word, randomly. In other words, she got lucky. The same goes when everything goes wrong, she will not be able to discover what she is doing wrong because she is not following any system.

The most important thing about having a system is that all the rules that govern it were made when there was no money at risk. This way you are sure that every decision taken based on the system is in your best interests. These decisions are not clouded by psychological factors (fear, greed, hope, etc.) that are present when real money is at risk.

FACT - You need a system or methodology.

This will help you realize whether what you are doing is right or wrong. It will also guide you through each trade. We all make mistakes occasionally, but recognizing them gives you a chance to study, learn from and work past them. Remember, the only way to get consistent results is by strictly following your trading system.

Success in Forex = Learning + Practicing + Update Knowledge

Not Having a Business Plan

 If anyone saw an incredible business opportunity with almost no competitors and a great demand for a certain product, what is he or she likely to do? Probably do a lot planning before entering into that market, as most businesspersons do, or rather, as every successful business did.

During this process, the individual will probably discover things that could have gotten him or her in trouble if she or he had ignored them. And this is exactly what a plan does, prepares you for the troubles you might encounter during your adventure.

I wonder then what happens when it comes to trading. Why is it that traders commit themselves to something barely known? You probably guessed it; they want the money right now! Most traders think “Why should I plan something when I could be getting rich by the minute? Let’s do the planning some time later.” They come to the market with such unrealistic expectations, and think that success is achievable in a matter of weeks.

So, what exactly does a business plan do for me? It prepares you, for any contingency that should arise, and the most probable thing is that you will encounter a few surprises.

Take for instance, what would happen if your system suffers the biggest drawdown ever (drawdown is a chain of consecutive losing trades)? Would you quit trading? Or even change your system? Review your system and determine if the market conditions have changed so that you will have to adapt to the market? It should answer this and other questions that are essential parts of handling the business.

FACT - Trading the Forex market, as any other market, should be treated as a business, not a hobby. It will have pitfalls, and you should be prepared for them.

The most important thing about a business plan is that the decisions, observations and limits are set on it, and they were made with your feet on the ground. You will know that by relying on it, you will make the right decision. If you encounter difficult times in trading, your common sense will try to lie to you, will try to make you believe things are alright, and without a business plan it could be the end of your trading career.

Success in Forex = Learning + Practicing + Update Knowledge

How To Be Successful Forex Trader - Looking for Excitement

 Some other traders are attracted to the Forex market or any other financial market because of the excitement that is to be and be named a trader. And to tell you the truth, it is very exciting. But if this is the main reason you were attracted to the Forex market, or more precisely, this is the reason you are still trading or interested in trading the Forex market, sooner or later you will discover the most expensive adventure you have ever known.

At first, it is all excitement, but as the time goes by, and traders get more involved in the trading process, they realize it is not as easy they thought it would be. All the excitement calms down, and it becomes an obsession. At this phase, only the 5% of all traders, the ones that are consistent profitable, still think it is exciting.

Believe me, there is nothing less exciting than losing money month after month. This happens to around 90% of all traders.

I am aware most of us think trading is exciting, and there is nothing wrong with that, as long as it is not the main reason you are still trading or intend to trade.

There are many other exciting adventures that are way cheaper than trading. Analyze it, because trading, if treated this way, could be a very expensive adventure.

FACT - Yes, trading is exciting, but this should not be the main reason you are trading or intend to trade. Do some thinking on it, otherwise, you will find out the hard way as many have done.

Success in Forex = Learning + Practicing + Update Knowledge

How To Be Successful Forex Trader-Looking For Easy Money

Unfortunately, most people are attracted to the Forex market for this reason.

All because of the publicity of:

• Some brokers showing or rather trying to show how easy is to trade and make money almost instantly in the Forex market
• Signals providers offering the best signals that will make you rich instantly and reach the financial freedom every trader is looking for by showing you the secrets of the big dogs.

Is it easy to trade?

Yes, it is true, everyone can do it, putting on a trade is only one click away.

Is it easy to make money?

Yes, I will have to agree with this one again, it is easy to make money. No knowledge of even what a constitutes a currency is required to make a winning trade. What they don't tell you though, is that it is even easier to lose a trade (because of the spread).

What is important here is that you cannot earn a living trading that way. In order to make a living trading the Forex market, you need to be consistent, and believe me, this is no easy task. To be a consistent profitable trader means that over several periods of time a trader makes money. Just 5% of all traders achieve this goal. Therefore, it is possible, but in no way easy.

Is it possible that a signal provider could make a trader rich? I don't think so. There are no certainties in this business; in fact, no one (signal providers) will ever care if you lose money. The only person responsible for losing money following someone else’s advice, will be you. Because you are the one who is actually executing the trades.

There are no short cuts; no one will ever make you rich but yourself. How do we achieve this? Working hard, this is the only way you can succeed as a trader.

Besides, what would you get by following someone else's advice? Nothing, following blindly someone else's advice would not give you the knowledge, the experience and nothing else good at all. Because you do not know the reasons behind any trade, you don't even know if the signals come from a system. You might make some money if the signals are good. But let me ask you another question… Do you intend to rely on one signal provider for the rest of your life? I don't think so.

So at the end, you will lose precious knowledge and experience that you could have gained by trading on your own, and most importantly, you will have lost time.

And what about the big dogs’ secrets?

Again, there are no secrets, the only truthful secret is that there are no secrets, but please keep this between you and us J 

FACT - There is no easy way to become a consistent profitable trader. There are no shortcuts, and the only way to get there is through hard work, self-discipline, patience, understanding the market, experience, taking only calculated risks, and more characteristics that we will learn throughout the course.

How To Be Successful Forex Trader-The Search for the Holy Grail

Many traders spend years and years trying to find the holy grail of trading. That magic indicator or set of indicators that will make them rich easily, known only by a handful of traders.

The Truth is that there is NO Holy Grail

There is no indicator or system that will make you rich easily. The best traders have no holy grail, it isn’t their system what makes them superior traders, they have other characteristics such as self-discipline, patience, they work hard, they take calculated risks, they do trade consistently based on a trading system (it does not need to be THE PERFECT SYSTEM, just a system), they follow it follow it rigorously, they know they will never stop learning so they have their mind open to every possibility, and most importantly, they have accepted the risk, they know deep in their hearts they are risk-takers.

How come there is no Holy Grail?

Because the market changes. The market is never the same, each moment is unique, patterns are just similar. If all patterns are unique then the outcome of each one of them is statistically independent from one to the other. If every pattern is different, then all set of indicators or systems will fail from time to time.

The two most common mistakes traders are likely to make in this subject are:

Most traders try many systems or set of indicators and them drop them out because they failed a few times. They never give them the time required to accurately test the system.

Another common activity is when traders start out with an easy system, when it fails, they add an indicator that could had kept them out of that particular trade. Then it fails again and they add another indicator. They end up with a very complicated system that is hardly tradable. Then they drop out the system and the process starts all over again.

The important thing here is the valuable amount of time lost in these practices. Some of them spend a lifetime trying to find the nonexistent: the Holy Grail of Trading.

FACT - There is no holy grail. It isn’t wise to try to find the perfect system or indicator that will keep you out of losing, because losing is just part of this business, like spending in raw material in any other kind of business. Instead, you can focus in one indicator/system that will keep you in the market when good moves happen. With good money management and a good risk reward ratio, the odds will be in your favor!

How To Be Successful Forex Trader- Introduction

Most brokers agree that 90% of all traders lose money, 5% of them break even, and only 5% make money. These statistics are not that encouraging for us traders, but it is the reality.

I have good news for you though, the mistakes that cause this rate of failure are common and we have already identified most of them.

Some of these common mistakes are because they are lured into trading for the wrong reasons, and some others because they fail to work through some guidelines.

Being aware of these common mistakes and by learning to take the proper steps to deal with them, the odds will change in your favor.

Topics covered in this :

 The Search for the Holy Grail - Some traders spend most of their trading careers trying to find the perfect system and fail to realize where the key to success is.

 Looking for Easy Money - Trading successfully is no easy task, it is achievable but requires a lot of work and time.

Looking for Excitement - Being called a Forex trader is exciting, but having negative returns month after month is not.

 Not Having a Business Plan - A business plan is like a roadmap that will not only tell you when things are right but also when things go wrong.

 Not Having a System - Our job as traders is to generate consistent profits, and the only way to get there is through a trading system that fits your needs as a trader.

Not Using Money Management - MM helps us avoid the risk of ruin, but at the same time it allows us to geometrically increase our profits.

 Lack of Discipline - Having a trading plan and a business plan is not enough, we need to strictly follow all our rules.

 Not Being Aware of Human Nature - Some behavior that might seem logical on our everyday life, could be disastrous to our trading career.

 Not Being Psychology Tuned - Being aware of the most
common psychological barriers will put us one step ahead.

Forex Trading, Trading System Phases

In this section we will see the steps you need to take in order to create a successful system.

Once you have chosen a type of trading system (mechanical or discretional), chosen a concept and a trading style, follow these steps to create your system.

1. Historical Moves:

While looking at historical charts (the time frame you have chosen and within the concept you have chosen) identify some substantial moves. Find as many as you can so you can have a large sample.

2. Set Up:

See what all these moves have in common. For instance, you may notice that all these moves were formed after a consolidation pattern, or a technical indicator reading was always above 50 for the up-moves and below 50 for the down-moves, or the EMA(50) was always above or below the price action when the move occurred, or the market always traded above LOPS or HOPS, or they all developed at certain time, etc. Set-ups tell you the conditions that have to be present in order for the move to happen. Set-ups are a warning that a possible trade could come. Whenever you see these conditions in the future, you need to get ready because there is a possibility that your system signals a trade.

3. Determine Your Entry Rules:

Find a trigger signal that is present in of the chosen moves most (it will be impossible to find a trigger for all moves). It could be a MA crossover, a specific indicator reading, a price reversal pattern (reversal candlesticks), or it can be a combination of many, like a reversal pattern off an important level (HOPS, LOPS, PP, Fibonacci retracement, etc.), a moving average crossover when the indicator reading is at certain point, etc. Some entry points seem brilliant at first glance since you are not considering how many times your system triggers a signal when the actual move (in your favor) is not present.

4. Risk Management:

Determine at what point you are going to get out of the market because your trade isn’t working, also determine if you are going to use a trailing stop or not (if yes, what kind of trailing stop you are using).

5- Exit and TP Levels:

Sometimes your trade does not reach your take profit nor your stop loss level, in this cases you must use the same concept you used to get in the market to get out of it. For instance, if you used a crossover to get in the market, then a negative crossover will also get you out of the market (if your set-up is not present with the trigger signal, otherwise you would have to open a new contrary position), if you used price reversal patterns, then if you get a reversal pattern against you then you should exit the market. You also need to set your take profit levels. We advise to use a RR ratio at or greater than 2:1.

6. Trade Management:

Determine if you are going to trade multiple lots, scaling out, averaging, etc.

7. Money Management:

What technique of money management you are going to use?

8. System Testing

Trade your system in real time

Forex Trading, Trading Concepts

Choosing the right concept is also a large part of system development. Not all concepts of trading are good for every trader. Some traders feel more comfortable trading in direction of the trend while others feel more secure trading against it. This has something to do with the personality of each of us.

It is not unusual for Forex traders to mix concepts, sometimes traders use different concepts for different market conditions (i.e. to have a way to determine whether the market is trending or not, then choose the appropriate system).

Trend-following

This concept simply waits for a significant price movement then buys (or sells) on the hope that the price will maintain its trend so the trader will be able to sell higher (or buy back lower).

The trader must use a systematic approach to measure the trend. The accuracy in which traders measure the trend will dictate the systems performance.

Advantages:

· Trades in direction of the trend have a higher probability of success.

· When a trend is caught, trades usually make large profits.

· Trend-following systems usually have a very high RR ratio.

Disadvantages

· It is said that the market trends only 30% of the time

· Trend-following systems usually have low system accuracy.

· Trend-following systems get whipsawed during consolidation periods.

Common strategies:

· Breakout trading: After a period of consolidation, traders buy new highs or sell new lows (i.e. using entry orders).

· Pullback trading: Traders wait for pullbacks and buy or sell off important levels (Fibonacci retracement, Bollinger lower or upper band, LOPS, HOPS, etc.)

· MA strategies: Some traders use moving averages strategies (crossover, position of price in relation to MA) to trade this systems.

· Chart patterns: Rectangles and triangles are used to trade trends.

· Technical indicator signals: Many technical indicators can be applied to this type of trading (i.e. RSI centerline crossover, CCI extreme levels, ADX, etc.)

Counter-trend

This type of trading tries to profit from either a short-term reversal or a long term reversal. Short-term reversals are often called retracements. This strategy basically tries to buy at a reversal pattern (trend to reverse is a downtrend), or tries to sell at a reversal pattern (trend to reverse is an uptrend).

Advantages

· If the signal is correct, the entry price is close to the high/low of the reversal.

· Usually high RR ratios are used in this concept.

Disadvantages

· Trades against the direction of the trend have a higher rate of failure.

· Sometimes trying to pick the bottom or the top of the trend can lead us to have an even higher rate of failure.

Common strategies:

· Chart reversal patterns: Double tops and bottoms, head and shoulder and other reversal patterns can be used.

· Divergence trading: This signals when combined with price behavior tend to give a high accuracy rate.

Consolidation or Range Trading

A period of consolidation occurs when demand meets supply. It is also called sideways or ranging.

Advantages:

· It is said that the market stays in consolidation periods 70% of the time.

· Stop orders are placed close to the entry price

Disadvantages

· Extreme volatility may occur during these periods

· Sometimes the high and low of the range are not clearly defined

Common strategies:

• Indicator overbought/oversold condition: Stochastics are the most effective indicator to track overbought/oversold conditions.

• Buy at the bottom of the range/sell at the top of the range: When applied in combination with price behavior, this technique usually has a high accuracy.

If you are going to trade different market conditions then it is important that you use different strategies, most trend-following strategies will fail under consolidation periods and most consolidation periods strategies will fail when a trend is in place.

Take for instance: You have decided to use a MA to determine the trend of the market. Therefore, when the market is trending (price above/below the MA) you use a trend-following strategy. In addition, when the market is not trending (the MA line is flat or close to flat) then you use a consolidation strategy.

Also, when you use a counter-trend strategy, for instance a chart reversal pattern, if it was a valid pattern and the trend reverses, then you can use an exit strategy based on a trend-following system so you are able to catch most of the trend.

Technical Analysis, Technical Indicators, Time-Frames

There are different periods in which a currency pair could be charted: monthly, weekly, daily, hourly, 30-minute, 5-minute, etc.

Each timeframe has its unique trend; this is the reason why there is no absolute trend for any currency, take the following charts for example.

EURUSD Hourly Chart

[Chart 30]

EURUSD Daily Chart

[Chart 31]

In these charts, a swing trader focusing in the 1H chart could assess: well there is no trend (ranging market) right now for the EURUSD while a long-term trader could assess: the trend for the EURUSD is clearly up. Which trader is wrong? No one, both of them are correct. Both of them have effectively determined the trend in the timeframe they are focusing on.

Of course, the market condition in the 1H chart is most likely to continue for the next couple of days while the market condition in the daily chart is likely to continue for the next month or so.

The same goes when we use indicators. Sometimes the same indicator could be signalling the opposite signals on the same currency pair on different time frames.

Take for instance the following charts:

GBPJPY 15 Minute

[Chart 32]

GBPJPY 4H

[Chart 33]

On the first chart (15min) the stochastics are in an oversold situation however, at the same time, in the 4H chart the stochastics did give a sell signal (crossing from the overbought territory to the neutral territory). The reason for this simple, remember all indicators go back n-periods to make a calculation, in this particular case, the 7 period stochastics in the 15 min chart went back 8 candlesticks to complete its calculation (1.75 hours). The stochastics in the 4H chart also represent 8 candlesticks but those 21 candles represent around 1.5 days worth of data. The market conditions are completely different during those periods.

Obviously, it is better to trade when many timeframes indicate the same market condition (i.e. both, the 15 min and the 4H chart indicate an oversold condition). When this happens, the probability of success of the given signal increases enormously.

Is important to realize that the longer the timeframe the more impact it will have in the market. For instance, an oversold condition in the 4H chart is more important than an overbought condition in the 15 min chart. More important because the “signaled market condition” will last for a greater time in longer time frames than in the shorter time frames.

Which timeframe should I use?

When trying to decide which timeframe to trade in we must take in consideration two important factors: the time dedicated to your trading and your personality.

How much time a day/week are we going to dedicate to our trading? Obviously if you have a day job and do not have the possibility to monitor your trades, then it would be better to focus on the 4H or 1H chart, and even daily charts can work out. If there is a possibility to monitor your trades then you can use the 30 min charts.

On the other hand, if you are a full time trader, then you have the possibility to trade shorter timeframes such as the 5 or 15 min charts.

However, we must almost consider that when you are a full time trader there is a chance that trading shorter timeframes does not fit your personality. The same goes for traders with a day job, there is a possibility that trading the longer term just will not work. I have a friend who started trading the FX market using the 1min chart. His trading wasn’t going the way he expected so he moved to the 15 min, then to the 30 min and finally to the 1H charts, where he felt most comfortable trading (and of course profits also increased).

So to summarize, you should use the time frames that better fit your personality and time requirements, and the best way to know which one fits you better is by trading as many time frames as possible, then choose the one you felt most comfortable with.

Technical Analysis, Technical Indicators, Important Consideration about Technical Indicators

Remember that some indicators work best during trending markets while others generate best results under ranging or trendless conditions.

For this reason it is important to choose different indicators for different market conditions. For instance, we could use one oscillator to forecast tops and bottoms when the market is ranging, but once either the top or bottom is broken, we could use the CCI to take signals based on extreme levels.

To trade based only on one indicator could be risky, we need to adapt our strategy to the different market conditions, and combine preferably indicators of different nature, for example, use oscillators in combination with candlestick reversal patterns to get our trading signals.

The other extreme is not good either, using a lot of indicators could complicate trading decisions and we could end up with a system that is hardly tradable.

For now, get familiar with each indicator and pattern studied in these past three lessons. Try to see which one of them fits you better and what combination of technical tools could help you achieve better results.

Technical Analysis, Technical Indicators, Pivot Points

In a few words, a pivot point (PP) is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.
Why PP works?
They work simply because many traders and investors (including bank and institutional traders) use and trust them. It is known by every trader that the pivot point is an important measure of strength or weakness of any market.
There are several ways to calculate 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).
Warning – some pretty boring maths ahead. The good news is that almost all charting platforms will automatically calculate this for you and draw the lines on in whatever pretty colour you like. But as this is the ADVANCED course we think you should have a basic idea of how they are calculated.
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 = 1.2436
So, 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. In addition, if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. In 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 has been an ongoing battle deciding at what times 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 (obviously the high and low in between those hours).
Besides the calculation of the PP, there are other support and resistance levels that are calculated using 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 ) = R1 + (PP – S1)
Where, H is the High of the previous period
L is the low of the previous period
Continuing with the example above, PP = 1.2436
S1 = (1.2436 * 2) - 1.2474 = 1.2398
R1 = (1.2436 * 2) – 1.2376 = 1.2496
R2 = 1.2496 + (1.2436 – 1.2398) = 1.2338
S2 = 1.2436 – (1.2496 – 1.2398) = 1.2534
These levels are supposed to mark support and resistance levels for the current session.
In the next chart we have calculated the PP and the support and resistance levels for September 5th.
S2 = 1.2616
S1 = 1.2579
PP = 1.2545
R1 = 1.2508
R2 = 1.2474

[Chart 1]

Vertical lines separate sessions (4th and 5th of September). As we can see, the market went rapidly below the PP level. From that point on, we should be careful with longs, and start thinking on shorts, because the sentiment of traders and investors is turning to “net short”.

Notice how the PP represents a resistance on early September 5th. Notice also S1 rejected twice the price as it approached the S1 level representing good trading opportunities. Finally, S2 marked a good support, this indicates weakness on current bears, which tells us that the sentiment is not as strong as it was at the beginning of the trading 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. In addition, we can see possible levels that might offer support and resistance throughout the week or month. Calculating the weekly or monthly pivot point is mostly used by long term traders, and as we said, it gives us a good idea about the longer term trend.