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

How To be a successful FOREX trader ?

To be a successful FOREX trader you need a trading strategy. There is no one set strategy that is good for all traders; rather, each trader needs to develop his or her individual approach to the FOREX. Some traders rely solely on technical analysis while others prefer fundamental analysis,

but many successful FOREX traders use a combination of both to get a broad overview of the market and for plotting entry and exit points.

Technical analysis relies on one key concept: Prices move by trends. The common saying in FOREX is 'The trend is your friend.' Market movements have identifiable patterns that have been studied over many years and a thorough understanding of these trends and how they can be read forms the basis of a good trading strategy.

There are many analytical tools available in ForexGento understand market movements. The beginner FOREX trader is well advised to study each one separately for getting a working knowledge of their concepts and application. Once one has been understood, keep on using it while studying others. Each tool tends to reinforce the others.

Discretionary Trading vs. System Trading

There are two main types of traders in the financial markets…discretionary traders and system traders. A discretionary trader will apply any approach that they see fit for the current market conditions while a system trader will use a defined set of rules to identify trading opportunities. I think new traders should learn as much as possible about fundamental and technical analysis, but should be thinking about developing a set of rules to determine when to trade.

The advantage of system trading over discretionary trading is that emotions do not have the same influence over the decisions that systems traders make, since the rules for entry and exit are clear. Discretionary traders will react to the current market conditions, but may rarely react the same for two trades in a row, increasing the chance of poor decisions by the less experienced traders. Also, the systems trader can go back to see if the rules they intend to use in their trading decisions are good enough to result in profitable trading over a series of trades. If it does, then the systems trader just has to make sure that they take the trades that their system identifies and make sure that they execute according to the rules. This can lead to consistent results and make it easier to take trades even after a few losses in a row. After all, you have historical results to back up your trading decisions. I think that the rules should cover at least a few key points to include these:

1. Determine whether you are looking for a buy or a sell.

2. Find your entry.

3. Identify your initial risk.

4. Find your exit.

In the FX Power Courses, we recommend trading in the direction of the trend on the daily chart and to use a risk:reward ratio of at least 1:2 on your trades. If you are risking 50 pips on a trade, then look for at least 100 pips in profit. This way, you only have to win about 40% of your trades to be profitable. But I think that if a trader uses the daily chart to identify the trend and then moves down to the 4-hour or hourly chart to find their entry and exit, a 50% win ratio of attainable. If you win more when you are right than you lose when you are wrong, this can lead to consistently profitable results. Next week we will take a look at different ways to identify the direction of the trend.

Ranging Price action

Now this is where the chart can become interesting. By using the price action counting of the swing highs and lows we can know at a very early stage IF price is going to start to develop range bound activity.

• Price is not making new highs OR new lows

I don't mean all time highs/lows or new day/week/month highs/lows... just simply a new chart swing high or low. Price will start to stall and not make a new swing high/low and typically will stay contained within the last swing high and low that was made on the chart. Isn't that a simple definition?

Range rule definitions

• Price doesn't make a new high or low on the move
• If price stays contained within the last swing high and swing low to be made, price will remain range bound until it makes news move highs or lows.
• Price confirms the range when a lower high and a higher low is made within the previous swing high and low.

In the chart below you can see that from the left side of the chart price is making LH's & LL's all the way to the first blue arrow which in real time would be the latest lowest low. Price then moves higher to make a HH. These two swing levels have been highlighted.

At the point of the chart, in real time, price needs to either start moving higher past the last swing high (red Arrow) making a new high OR move lower past the last swing low (blue arrow) making a new low. Until either of those things happens price will most likely remain range bound. In this example that is what happened.

Forex Money Management and Trailing Stops

After having identified your trade entry price and your initial risk which if the difference between your entry and initial protective stop, many traders will also enter a limit order to take profits.

In the FX Power Courses, we normally recommend using a 1:2 risk:reward ratio to determine that exit level. If you are risking 50 pips on the trade, you should look for a minimum of 100 pips in potential profit. This way, if you are able to maintain close to a 50% win ratio on your trades, you can be consistently profitable. However, having the patience and discipline to wait for the market to reach that price level to take profits is much harder than it sounds. If the market moves up towards the profit target and then reverses and moves back towards the entry price, many new traders will exit taking a small profit. While this sounds like a good move, in the long run this usually results in a good win percentage but no profits. The reason is that the trader will end up with bigger losing trades than winning trades. How do we work around this? The answer is normally to set your initial protective stop and limit order to take profits and then just the trades play out on their own. To keep you from losing on a trade that showed a decent profit at one point, the use of an automatic trailing stop can be of great value. I recommend using a trailing stop the same size as your risk. Otherwise, if you are risking 50 pips and looking for a 100 pip gain, use a 50 pip automatic trailing stop. This way your protective stop will move to the breakeven level when/if the market moves halfway to your target. Now one of two things can happen, you can break even or take the full profit. That is a good position to be in and a great way to play the FX markets 24 hours a day.