The use of Fibonacci retracement levels and pivot points are often considered by their adherents as complete, self contained trading strategies. Some traders are diehard fans of the Fibonacci and pivot point trading. Discover the Forex Time Machine. Learn Fibonacci Retracement. Understand the Forex Charts.
I want to make it clear the Fibonacci Retracement and the Pivot Points are two different methods and must not be confused as a single trading method. The horizontal price levels that are generated through Fibonacci retracement levels and the pivot points are calculated using different methods and formulas. However, both produce mathematically derived support and resistance levels that traders may use either as indicators of possible retracement turns or as zones to watch for breakouts.
Why Fibonacci retracement levels and the pivot points work most of the time? What makes these tools work surprisingly well under diverse market conditions is the simple fact that many traders both small and large use Fibonacci retracement levels and pivot points in their trading.
This is why significant price action occurs around these levels due to the fact that many traders are watching and reacting to these price levels. Therefore the levels derived from these two tools become self fulfilling prophecy.
This phenomenon contributes to the Fibonacci retracement levels and pivot points frequent effectiveness and accuracy in describing the market movement. The most common Fibonacci retracement levels are 23.6%, 38.2% and 61.8%. These three Fibonacci retracement levels are most frequently followed by the traders.
Fibonacci retracement levels are very popular among the traders. You will hear very often, the commentary on CNBC or Bloomberg that price is approaching the 38.2% retracement level and something important like a turn could occur at this level. This shows the popularity of Fibonacci retracement levels among the trading community.
Fibonacci retracements can be traded either as a breakout opportunity or as a retracement bounce. Both methods have clear cut locations for the stop loss placement similar to most support/resistance trading methods. Fibonacci levels can also be used as profit targets for existing open trades.
Pivot points are derived mathematically from the previous day’s data that includes the previous day’s high. Low and close. The main pivot point (PP) is calculated by taking the average of the high, low and close of the previous days’ price action.
Four other primary pivot points are calculated from the main pivot point (PP). Two are below the main PP. Two are above the main PP. The levels above are R1 and R2 where R stands for resistance.
The two levels below the main PP are the S1 and S2 where S stands for the Support. Often these pivot points are further extended to R3 and S3. You can easily find a pivot point calculator online. Most of the charting software also can calculate the pivot points.
Pivot point trading can be a highly profitable trading method. Many trader use pivot points in their trading! However, it is always good for the trader to know how these pivot point numbers are calculated. This will give the trader an understanding of how these numbers are calculated and what are the variables that are used to calculate them.