Day Trading Forex Futures with Pivot Points
Currency trading is increasing in popularity among individual investors, especially those in the United States. Just a few short years ago, it was relatively difficult and costly to access the spot Forex market. But barriers have been broken down, competition has increased, and costs have fallen. As a result, more and more retail traders are entering the realm of spot Forex trading.
But there’s another way to enter the world of currency trading, and it’s through the Chicago Mercantile Exchange (CME). The CME first offered Foreign Exchange (FX) futures in 1972. Today, the exchange offers futures on 41 currency pairs, options on 31 futures contracts, and over $60 billion in liquidity. Currency futures trade on the CME’s renowned Globex platform, alongside other popular futures contracts such as the e-mini equity indices.
Spot vs. Futures
To be sure, there are a some big differences between the contracts that trade in the spot Forex market and the FX futures. Perhaps the biggest — and arguably most important — difference is that spot Forex contracts trade over the counter at no particular central location, while FX futures clear at the CME. The central clearing and guarantee of counterparty credit by the CME are huge benefits of FX futures over spot Forex contracts.
The dealing details differ dramatically between the two instruments. The table below details some of the biggest differences:
Over-the-counter (Spot, Forex) Foreign Exchange Futures
$2+ trillion daily turnover $60 billion in liquidity
Commission free Commissions
Guaranteed stops No guarantees
Fixed pip spread Bid/Ask spread
24 hour trading 23 hour trading
100:1 up to 400:1 leverage 20:1 to 50:1 leverage
Varying quote currencies All rates quoted in dollars
Plain vanilla & Exotic options Plain vanilla options
Mini accounts Mini contracts (limited)
Interest debits & credits Carrying costs
Automatic rollover 3 month expiration cycle
Whether you trade spot contracts or futures on currencies will depend upon your own risk tolerance, equity, and other needs. I’ve traded spot, through several different dealers, and the futures for many years. I continue to use both instruments in varying situations, alternating my selection to fit different strategies.
I like to use the spot contracts when executing very short-term strategies, such as a straddle surrounding a high profile economic announcement or central bank meeting. For example, I would use the EUR/USD spot contract to execute a trade during a Federal Reserve announcement or Non-farm payrolls release. Or I would use the USD/JPY spot contract to trade a Bank of Japan meeting. The guaranteed stops that some spot Forex dealers offer are very useful when trading around a volatile announcement like a central bank meeting.
Additionally, I favor the spot contracts when trading cross rates — the exchange rates that exclude the U.S. dollar; for example: EUR/JPY, GBP/CHF, AUD/NZD, and GBP/HUF. Cross rates can be an excellent tool to take advantage of varying degrees of relative strength in individual currencies. And they are a great way to trade the currency market when the majors are at an equilibrium (read: trading range). You can find tremendous trends in the cross rates, and you can find hundreds of cross rates at many spot Forex dealers. On the other hand, futures on cross rates are comparatively illiquid and limited.
But for the most part, I trade the currency futures. That’s because the cost of trading futures is, in most cases, lower than trading spot Forex. I’ve found futures cost about $20, or less, per round turn, while the spot Forex contracts cost between $30 to $50, and up, per round turn. The lower cost of trading currency futures is why I use the instrument in all of my day trading strategies, including the pivot point methodology.
(But please know that you can apply spot Forex contracts to the methodology that I’m about to show you.)
Pivot points are a popular tool used by futures traders in all sorts of markets, ranging from equity indices to crude oil. And, sure enough, pivot points are readily applied to trading currency futures.
Pivot points are support and resistance levels derived from the previous period’s high, low, and closing values. There are a variety of pivot values with which to trade, including monthly, weekly, and daily values. You could even calculate hourly values. When determining which period to trade with, you’ve got to consider your time frame as an individual and your particular style. I’ll use daily pivot points for the purpose of this article since the focus is day trading.
Daily pivot points give a structure to each new trading day in the currency market. With these values you can use traditional support and resistance techniques to enter and exit trades. But before I get to the strategy, I’ll show you how to calculate pivot values.
Pivot Point (PP) = (High + Low + Close) / 3
Resistance 1 (R1) = (2 x Pivot Point) – Low
Support 1 (S1) = (2 x Pivot Point) – High
Resistance 2 (R2) = Pivot Point + (Resistance 1 – Support 1)
Support 2 (S2) = Pivot Point – (Resistance 1 – Support 1)
(Pivot values for several different currency pairs are posted on the TradingMarkets web site every day.)
The pivot values are plotted as horizontal levels which, in turn, serve as support and resistance. The pivot point itself can be thought of as the day’s mid-point, or fulcrum. It’s where the buyers and sellers meet to determine the day’s trend in a currency pair. The support and resistance levels that are plotted around the pivot point are just that: potential support and resistance.
A daily pivot point (in green), S2, S1, R1, and R2 values are plotted on the chart below of the EUR/USD FX future. The chart is a 5-minute interval. Notice how the Euro broke above the pivot point early in the day, and then proceeded to trade up to R1, where it met resistance and gyrated for the rest of the day.
Follow The Intraday Trend
The power of pivot points is unleashed when you follow an unfolding trend during the day, and use the pivot values to measure the magnitude of trend. Additionally, the pivot points can be used to determine entry points into a trade. Applying simple breakout and breakdown entries around pivot points is a powerful way of using the tool.
An example of following the trend of the day as it unfolds, and entering trades on the break of pivot values, is illustrated on the 5-minute chart below of the JPY/USD contract. In this example, the Yen began the day near its pivot value, rolled over from R1, and proceeded to breakdown below the pivot point, S1, and S2. The pair dropped by about 60 ticks, providing ample opportunity for a day trader to make money on each breakdown below support. These types of intraday trends unfold a few times throughout the trading week, and they are relatively easy to exploit by following the futures contract through its pivot values.
A second way of leveraging the power of pivots in the currency futures market is by adding a technical indicator that can pinpoint buy and sell signals. You will still want to use traditional support and resistance techniques around the pivot values. The purpose of adding to the indicator is to help in the timing of an entry into a trade. Above all else, though, you want to trade in the direction of the unfolding trend.
The MACD (12,26,9) is added to the 5-minute Euro chart below. The MACD generates simple buy and sell signals with the crossing of the fast and slow lines. Quite simply, it’s time to buy when the fast line crosses above the slow. Conversely, it’s time to sell when the fast line crosses below the slow line. Only the buy signals are highlighted on the chart below because the Euro was in an upward trend during the day. The sell signals are ignored due to the upward trend in the contract.
The Euro began the day at 1.2640 and ended near 1.2740 for a move of roughly 100 ticks. That’s a lot of potential profit, part of which could have been captured by simply following the trend of the day and taking the buy signals coming from the MACD.
Pivot Point Tips And Tricks
Trading with pivot points is not a big secret. Floor traders and dealing desks have been applying the methodology for decades in the currency market. But what separates the profitable traders from the losers is the simple act of following the trend of the day, cutting losses short, and letting profits run to the next pivot value. In addition, there are a few observations I’ve made over the years that I can add to the simple truth of following the trend.
The first tip I want to share is that the best trend days usually unfold when the currency begins the trading day near its pivot point. You might have already made this observation in the two above examples of the Euro and Yen. If you didn’t, then take a second and jump back to the above charts, and note how the Euro and Yen began the day at or very near their pivot points. There are usually two or three days out of the week during which the majors such as the Euro, Yen, Pound, and Franc begin trading at their daily pivot. These are the days to look for a big trend to unfold.
If the currency that you’re trading begins the day far away from the pivot, either below S2 or above R2, then it’s probably a day that you want to walk away from. When a currency opens the day at one of the daily pivot extremes, it usually spends the rest of the session gyrating around that level. Avoid trying to trade a reversal of the overnight trend. Occasionally it might occur, but more often than not a big overnight trend will stall out at R2 or S2. The temptation is there to try to squeeze out a small profit, or bet on a reversal of the overnight trend. But the reality is that these are the days that can destroy a trader’s equity.
You will find two examples below of strong overnight trends leading to massive gaps at the open of New York trading in the futures market. The first is an example of a gap up in the Euro. The pair opened at R2, where it spent the rest of the session. The second example is of a gap down in the Pound. The contract opened below S2, and spent the rest of the day gyrating in a tight range.
These days are best left to the floor traders. In the long run, you’ll be better off not even trying to trade during days when the currency futures stage a substantial gap, either high or lower. You’ll be better of by waiting for those days when the currency futures open near their pivot points.
Profit With Pivots
Day trading with pivot points can be applied to the spot Forex market just as they are in the currency futures market. Support and resistance, and the techniques that accompany these price levels, are consistent across all markets. In fact, pivot points have been used across dealing desks for decades in the spot Forex market. To the individual investor, however, it makes more sense to use currency futures when day trading simply because of the lower costs associated with trading futures.
The most important point to remember when applying pivot points to day trading currency futures is to follow the trend of the day, and simply look to enter into an unfolding trend as a pair makes its way through pivot values. Pay special attention to those days when the currency opens at or very near its pivot point. And avoid trading when a contract opens far away from its pivot point, at or beyond S2 and R2 values.
Eric Utley is a full-time trader with over a decade of experience in equities, equity options, futures, and currencies. He specializes in trading currencies, using a combination of quantitative, technical, and fundamental analysis. He is the lead contributor to INVESToolsCT.com, manages a currency trading blog, produces educational programs, and hosts a weekly online seminar.