This is the third post in my series on pivot points. If you missed either of the other two, or the free pivot-point calculator download, you can access them all on our website via the links below. Plus, don’t forget to sign up for the free Pivot Point Trader strategy.
When applied to a price chart, the five key pivot points will look something like this:
Last week we looked at three sound strategies that you can apply to pivot point trading.
Today I want to run through my ten top tips for getting the most out of these trading strategies …
Pivot Point Trading Guidelines
1. Pivot points are calculated from the previous day’s highs and lows. It’s easiest to pick this data off a daily chart, but when you come to plot and use your pivot points, you’ll need a shorter timescale that’s suitable for intraday trading (5, 10 or 15 minute charts, for example).
2. Note where the market opens. Normally it opens relatively close to the central pivot point. If it’s above the central pivot point, it’s considered a bullish sign, and we should be looking for buying opportunities. If it’s below the central level, it’s considered bearish, and we should be looking for selling opportunities.
3. If the market opens above R1 or below S1, this is considered a distant opening, and it is likely that the price will correct itself, pulling back towards the central pivot point. Trading this kind of set up is more difficult, and I wouldn’t recommend it for pivot-point novices.
4. The price has a natural affinity to the central pivot point. If there is no news affecting the market price, it is likely to trade for the day between the pivot point and S1 or R1. However, significant news can cause the price to move through S1 or R1, to S2 or R2, or even beyond to the very volatile areas of S3 or R3.
5. Don’t enter a trade until the price has clearly broken through or rebounded from one of the pivot points. How you decide on what constitutes a rebound or a breakout will depend on your strategy (how many pips you’re trying to make, what timeframe you’re working to, etc). Whatever your criteria, be careful not to anticipate this move as there can be a lot of congestion around the pivot points. Waiting for a second candlestick is a common method of confirming the signal.
6. When the movement is confirmed, we enter our trade, with the next level as our profit target, and our stop loss positioned at a safe distance behind the breached level.
Here’s an example from Eur/USD:
7. You’ll notice that I didn’t enter another Sell trade at S2. The reason for this is that S2 and R2 are considered the daily “floor” and “ceiling” – i.e. we don’t expect the price to move beyond them. That’s not to say that they can’t be breached, especially in a strongly trending market, but the tendency of the price is to move back towards the central pivot point, so this is not a good area to be trading in. The general rule is: the further the price moves away from the central pivot point, the weaker the trading opportunity.
8. Mid-lines are the halfway levels between your 5 pivot points. The calculations for these can be found on the Pivot Point Calculator, along with R3 and S3. These are not strong areas of support or resistance, but can be useful extra guidelines for setting stop loss levels.
9. When trading pivot points, be mindful of the medium-term market behaviour. In a sideways market, the price will often fluctuate neatly between PP and R1 or S1. In a strongly trending market, we can expect to see pivot points breached more readily. As traders, we can take advantage of both of these scenarios, with channel trades and breakout trades (see last week’s posting).
10. Pivot point traders always try to catch the market when it is close to the pivot point early in the day – this should offer the highest success rates.
That’s it for pivot point trading!
I’d be interested to hear about any successful trading strategies or ideas that you’ve come across with pivot points. Comments please …