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
|Bullish||If market is above PP at beginning of day|
|Bearish||If 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 Rules||Long||Short|
|Entry Rule||If 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 firm||You 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 Rule||SL a few pips below PP, or below S1 for more|
|SL a few pips above PP, or above R1 for more trade leeway|
|Take Profit Rule||TP at S2, and if it gets to S1, move SL to breakeven||TP at R2, and if price reaches R1, move SL to breakeven|
Example of USD/JPY, Daily Pivot Levels (April 11, 2011):
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.
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.
Forex Trading Strategies
|Lesson 1||profitable Forex trading strategies|
|Lesson 2||Most popular trading strategies|
|Lesson 3||Forex Scalping Strategy|
|Lesson 4||Forex Trading Hedging Strategy|
|Lesson 5||Forex Trading Trendline Analysis|
|Lesson 6||Forex Trading Breakout Strategy|
|Lesson 7||Pivot Point Reversal Strategy|
|Lesson 8||Pivot Point Break Out Strategy|
|Lesson 9||News Trading Strategies|
|Lesson 10||Marker Sentiment Analysis|
|Lesson 11||Pivot Points Trading Strategy|