Forex Trading Basic

Use of Pivot Point Reversal Strategy in Forex Trading

Forex Trading Hedging Strategy

Pivot Point Reversal Strategy: If you have a good idea about the general direction of the market, you can take bounce trades off the Pivot Point in the direction of where the market was relative to PP at the open of the day.

Most of the traders see the Pivot Point as the major arbiter for determining if the market is going up or down. If the market starts its day above the Pivot Point, it is said to be up (bullish), and if it starts its day below, it is said to be down (bearish).

Pivot Point Reversal Strategy

Signal DirectionCondition
BullishIf market is above PP at beginning of day
BearishIf market is below PP at beginning of day

The more times a currency pair reaches a Pivot Point then reverses, the stronger the level gets, and pivoting simply means reaching a support or resistance level and then reversing.

So, using the Pivot Point means using it as a basis for general direction, you would try to take a bounce trade when the market retests the Pivot Point.

Entry & Exit Rules:

Entry & Exit RulesLongShort
Entry RuleIf price starts above PP, buy near the PP line with market or limit order. If PP is missed, and market advances strongly up, there is an alternate trade in the long-biased PP direction: if the market is stopped at R1 or R2 and falls back to PP, you can take a long trade from a PP bounce.If market starts below the PP, sell near the PP line with market or limit order. If PP is missed, and market declines strongly down, there is an alternate trade in the short-biased PP direction: if the market is stopped at S1 or S2 and is pulls back to PP, you can take a short trade from a PP bounce.
Entry Rule (Conservative)You would want the market to touch the line and take up a trade only when the market closes x pips above the PP level, suggesting that the line held firmYou would want the market to touch the line  and take up a trade only when the market closes x pips below the PP level, suggesting that the line held firm
Stop Loss RuleSL a few pips below PP, or below S1 for more
trade leeway
SL a few pips above PP, or above R1 for more trade leeway
Take Profit RuleTP at S2, and if it gets to S1, move SL to breakevenTP at R2, and if price reaches R1, move SL to breakeven

 Example of USD/JPY, Daily Pivot Levels (April 11, 2011):

example-of-usd
Here we have the market starting just below PP, which is signaling a short bias for the day, and the first bar of the day actually touching the PP level. Here is an interesting thing, look at the next bar after the PP level has been touched: it formed a long black candlestick which indicate that the Bears controlled the trading for most of the bar, without contest from the Berulls. It was no surprise when the price fell down from there, for the Bears. They were confident that they had the ball. The market quickly fell from the PP level down through S1 and S2. Only if you had been in the aggressive mode, that is, taking the short trade near PP, after watching that Bearish candlestick  could you have turned back this trade. You would also have to be up at the open of the bar, midnight GMT, or else you would have missed it. As the said, The early bird gets the worm.

You can Notice how the Bulls on the retreat for the day staged a nice counterattack at S3, repelling the Bears and pushing the market back up to retest the S1 level. This is a good illustration of Strategy #3, discussed below, where one can buy the market at S2 or S3 and take advantage of oversold conditions. The Bull Bouncers at S3 would have easily picked up a fast 70 pips if they had set a take profit 2 levels away at S1.

If you had miss the first bounce opportunity of the day at Pivot, you will find a second opportunity to take short bounce at S1. Because Pivot held firm earlier in the day, the day was a short-biased, and because S1 was breached earlier in the day, it role-reversed to become resistance. Savvy bearish bouncers took up positions at S1 to resist the S3 Bull Bouncers, and they became successfull.

The Bottom Line: Pivot Point Reversal Strategy

As we can see in the Pivot where S1 Bounce trades, observing the behavior of the candlestick after the first touch of the level can give insight into which team controls the ball: the bottom of the candlestick represents the Bears are in control, and the top represents  the Bulls are in control. The closer the close is to the high, the more power is credited to the Bulls, and the closer the close to the low, the more power is credited to the Bears.

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Please note that: because of the differences in trading conditions, all the forex strategies can not be applied to all broker platforms. So, Choosing Forex broker is a vital task. We would like to recommend you HYCM Broker. This broker has all the positive trading conditions necessary for any forex strategy to work. Read HYCM Broker Review to learn more.

Chapter 7

Forex Trading Strategies

Lesson 1profitable Forex trading strategies
Lesson 2Most popular trading strategies
Lesson 3Forex Scalping Strategy
Lesson 4Forex Trading Hedging Strategy
Lesson 5Forex Trading Trendline Analysis
Lesson 6Forex Trading Breakout Strategy
Lesson 7Pivot Point Reversal Strategy
Lesson 8Pivot Point Break Out Strategy
Lesson 9News Trading Strategies
Lesson 10Marker Sentiment Analysis
Lesson 11Pivot Points Trading Strategy

Go back to Main Page: Forex Trading For Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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