The following pivot point trading strategy has been around for a long time. It was originally used by floor traders. This was a nice and like shooting fish in a barrel way for flooring traders to have an thought of where the market was going during the class of the day using but a few bones calculations.
The pivot bespeak is defined equally the level at which the market management changes for the 24-hour interval. Using some simple math and the previous mean solar day’due south loftier, low and closing prices, a serial of points are set. These points tin be critical support and resistance levels. The pivot level, support and resistance levels calculated from those prices are collectively known every bit pivot levels.
Every 24-hour interval, the market place you are following has an open, high, depression and closing price for the day (some markets, such every bit the forex market, are open up 24 hours, but we mostly utilize midnight GMT (Greenwich Mean Time) equally the open and close time). This information basically contains all the data you need to apply pivot points.
The reason pin points are so popular is that they are predictive as opposed to lagging. Y’all utilise the previous day’s information to summate potential turning points for the day yous are about to trade (present day).
Considering many traders follow pivot points, you will often find that the market reacts at these levels. This gives you an opportunity to trade.
As an alternative to calculating pin points on your own, you can use our very own pivot point reckoner.
If you prefer to calculate the pivot points yourself, here are the formulas you demand:
Resistance three = High + 2*(Pivot – Low)
Resistance two = Pivot + (R1 – S1)
Resistance 1 = 2 * Pivot – Low
Pivot Signal = ( High + Close + Low )/iii
Support 1 = two * Pivot – High
Support 2 = Pivot – (R1 – S1)
Support 3 = Low – ii*(High – Pivot)
Equally y’all can see from the above formulas, merely by having the previous day’s high, low and close prices, you eventually end up with vii points: 3 resistance levels, 3 support levels and the bodily pivot betoken.
If
the market place opens above the pivot bespeak, then the bias for the day is long trades. If the market place opens below the pivot point, then the bias for the 24-hour interval is brusque trades.
The 3 most important pivot points are R1, S1 and the actual pivot betoken.
The general thought behind trading pivot points is to look for a reversal or break of R1 or S1. Past the fourth dimension the market place reaches R2 or R3, or S2 or S3, the market will already be overbought or
oversold
and these levels should exist used as cues to leave rather than enter.
A perfect setup would be for the market to open above the pin level and so stall slightly at R1 so go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.
Unfortunately, things don’t always go co-ordinate to plan we have to arroyo each trading mean solar day the best we can. I have picked a random day from the past, and what follows are some ideas on how you could have traded that day using pivot points.
On 12 August 2004, the EUR/USD had the following characteristics:
High – ane.2297
Depression – one.2213
Shut – i.2249
This gives us:
Resistance 3 = ane.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Signal = one.2253
Support one = one.2209
Support 2 = 1.2169
Support three = 1.2125
Have a glance at the 5-min nautical chart below:
The green line represents the pivot point. The blue lines are the 3 resistance levels: R1, R2 and R3. The red lines are the support levels: S1, S2 and S3.
There are many means to trade this scenario using pivot points but I shall walk yous through a few of them and demonstrate why some of them are good in certain situations and why some of them are not.
The Breakout Trade
At the outset of the day, we were below the pivot signal level, so our bias is for short trades. A aqueduct formed, so y’all’d be looking for a suspension out of the channel, preferably going downwards. In this blazon of trade, you would identify your sell entry order only beneath the lower aqueduct line with a stop order only above the upper aqueduct line and a target of S1 (ane.2209). On this day, though, S1 was very close to the breakout level so there wasn’t a huge turn a profit to be fabricated in the merchandise (13 pips). This is a good entry technique for yous. Simply because it wasn’t hugely profitable on this 24-hour interval doesn’t mean that it wouldn’t have been more profitable on another occassion.
The Pullback Trade
This is a great setup. The marketplace passes through S1 and then pulls back up. An entry order is placed below support, which in this example was the well-nigh contempo low before the pullback. A stop is then placed above the pullback (the well-nigh recent loftier – acme) and a target is prepare for S2. The trouble, though, in this example, was that the target of S2 (1.2169) was as well far, and the market never took out the previous support (shown on the graphic below with the grayness line), which was an indication that the market sentiment was offset to change.
Breakout of Resistance
As the twenty-four hours progressed, the market started heading back up to S1 (the top red line in the moving-picture show below) and formed a channel (also known as a “congestion area”). This is some other good setup for a trade. An entry order is placed simply to a higher place the upper aqueduct line, with a end just beneath the lower channel line and the offset target would exist the pivot line. If y’all were trading more than one position, and then y’all would close out one-half your position as the market approaches the pivot line, tighten your stop and then watch marketplace action at that level. As it happened, the marketplace never stopped and your 2d target and then became R1 (1.2293). This was also easily achieved and I would have closed out the rest of the position when that cost was hit.
Advanced
As I mentioned before, there are several ways to trade using pivot points. A more advanced method is to use the cross of two moving averages as a confirmation of a breakout. You tin can even use combinations of indicators to help you lot make a trading entry decision. It might be the cross of two averages and also MACD must exist in buy style. Mess around with a few of your favorite indicators but remember that the indicate is the breaking through of a level and that indicators are just confirmation.
Source: http://www.forex-central.net/pivot-point-trading-strategy.php
