Pivot Point Analysis is a robust and time tested method of market analysis. This strategy works in all markets that have an established range. The range is the high and low of a given time period and it accurately depicts the market participants exuberant bullishness and pessimistic bearishness for a given trading session.
The high and low are the two most important reference points for a given trading session. The high is a reference point for those who bought out of greed thinking that they were missing an opportunity. Similarly, the low depicts selling out of fear thinking that they would lose by staying in the long trade.
Pivot Points Analysis depends on a number of mathematical formulas that are not very complex but that use these three important reference points the High (H), Low (L) and the Close (C).
Unlike the stock market or the futures market that has an official open and close, forex is a 24 hour market with no open and close. We can take the N.Y Bank Settlement Time of 5:00 PM EST as the close of the day and 5:05 PM EST as the open of the next day while calculating our daily pivot point levels. Most of the time, we need to calculate only up to S2 and R2 and S3 and R3 levels would not be required.
R3 represents extreme bullishness in the market usually caused by news driven price shocks. R2 level is where the market usually experiences significant resistance and this level provides an exit target for long positions. In bearish market conditions, prices will tend to come close to R1 but most times will fail.
Similarly in a bullish market S1 is important while in a bearish market S2 is important. S3 rarely comes into play and is only effective in an extremely bearish market caused by a news driven event.
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