IN MY last column, I demonstrated the time of the day at which most highs and lows of the London FX session tend to occur, and why this tends to be the case. Today, I will focus on the price levels at which these highs/lows tend to be created using the pivot point indicator.
The indicator is a simple forward-looking tool which displays five levels on a price chart, where the mid-level is the average price of the prior trading day. To this mid-level, we add the prior day’s price range and we get the upper limit of the indicator – the R2 level. My reason for mentioning this is that, 82 per cent of the time, the price will be capped by this level, making it an excellent level to book a gain on a long position. If the market is declining on the day and we are short, we can instead use the S2 level. This follows the same logic of the R2 level, except that we subtract – rather than add – the prior day’s range to the mid-level.
The other two levels are good as stop loss levels for a position. On a positive day, the price will seldom trade below S1, while on a negative day we will rarely trade above R1. Therefore, if we estimate that the price will trade higher on the day, we can place our stop loss order under S1 and set our profit target at R2.
Feel free to check out an unlocked and free 17 minute educational video on this topic http://bit.ly/PivotCityAM
Alejandro Zambrano is a DailyFX analyst.
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