If you missed my earlier post on how to calculate pivot points and how to position them on your charts, it’s all still available on the website: click here. (Plus, I hope you downloaded the Trader’s Bulletin free pivot point calculator.)
Now we’re going to hone in on exactly how you use these tools to make profits by daytrading with these simple pivot point strategies.
This doesn’t apply to any particular instrument – pivot points are valid across equities … forex … commodities …
But remember, daily pivot points are only valid for that day’s trading. Tomorrow, there’ll be a new set of figures.
Ready, set, go …
Okay, I hope you’ve got your five lines set up on your chart: R2, R1, P, S1 & S2 …
Remember, these are all valid support and resistance levels. So, let’s see how we can use them.
1. Pivot Point Strategies: The trading channel
Here’s a 15 minute chart showing a days trading on one of the major European indices earlier this month:
It shows very typical behaviour around the pivot points:
– The price opens near to the central pivot point;
– It moves towards the central pivot point;
– It bounces off the central pivot point;
– It trades mainly in the range between the central pivot and the next pivot point level.
When a market isn’t trending strongly in one direction of another, this picture represents a very common way for the price to behave.
Plus – it shows us how simple it can be to collect profits by trading within this channel.
We don’t enter this trade until the bounce off the central pivot level is confirmed. Once we’re confident of the rebound we can open a trade and collect profits at the next pivot point.
Meanwhile, our stop loss can be tucked safely on the other side of the central pivot point.
2. Pivot Point Strategies: The breakouts
Here’s the same chart that I showed you last week – I chose this at random from the FTSE last month. It may not be a text-book example of how pivot points can work, but, day-to-day charts rarely look like the ones in the text books.
What I hope this shows, however, is that pivot points can be a real day-to-day work-horse for the trader.
What we see first is that the day’s trading opened above the central pivot point (the green line) – this is a bullish sign, and tells us that we should be looking for buying opportunities today.
We expect the price to move down towards the central level, or up towards R1, then to either break through these levels or rebound from them.
If the price moves down to the central pivot point, we could anticipate a rebound back up to the R1 level.
However, this isn’t what happens. Instead, the price moves up through R1 – this could be our signal to enter a long trade, with our profit target at R2.
Later in the session, the price moves back through R1 again, offering another buying opportunity in the direction of R2.
This is the gist of how trading breakouts with pivot points works.
However, the profit potential of this chart is complicated by a couple of factors. The first is the nasty whipsaws down below R1 before our profit target is reached. These aren’t uncommon with pivot points, so you need to think about how aggressive you want to be with your risk/reward ratio. If your stop loss is too tight, you’ll find yourself getting knocked out pretty often.
The second is how you’re going to get confirmation of a breakout (or a rebound). If we wait for a second candlestick, we may find that a good chunk of our profits have been eaten up. (I’ll cover this issue in more detail next week.)
3. Pivot Point Strategies: The Congestion Trick
The final strategy that I want to show you takes advantage of exactly that congestion that can cause problems in the other two strategies …
If you notice congestion building around one of the pivot points – you can use this to your advantage. Draw in a channel, showing you where the congestion is, and set an entry order on the break of this channel, like this:
When the price doses finally break free of this congestion, it’s likely to move to the next pivot point – and you can be ready to catch this move.
Part three coming next week …
The final part of this pivot-point “trilogy” will be coming next week. CLICK HERE TO GO STRAIGHT TO PART THREE: 10 TIPS FOR PIVOT POINT TRADERS
Don’t forget – if you missed the pivot point calculator giveaway last week, in my first pivot-point post, you can find it here.