Trading the pivot points
This lesson will cover the following
When it comes to trading the pivot points, logically it will bear many similarities to regular support/resistance trading.
First, we already noted that the central pivot point usually sets the sentiment tone for the day and thus shows if the general sentiment is bearish or bullish. By using this knowledge in conjunction with other technical analysis tools for proper decision-making, a trader can enter positions in the direction of the major trend.
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Second, the pivot points are a reliable guideline for setting your stop-loss and take-profit orders since the price is expected to halt and reverse at these price levels.
Third, penetration through the pivot points produces entry signals and secondary entry signals, which are even more reliable. For example, when the price is on the rise and runs through the R1, risk-prone traders can enter long right after a bar closes above the R1. Additionally, risk-averse traders who want to wait for a confirmation would prefer to wait for the price to pull back to the R1 and see if it rebounds from it, i.e. if it will switch roles and act as a support. If it does, this generates a secondary long-entry signal, with the breakout itself being the primary one, and secondary entries are more reliable than the primary ones.
Fourth, if the price doesnt manage to break through a pivot point, thus the pivot point succeeds at its role of support/resistance, this generates a with-trend entry signal. A buy signal is produced when the price drops to the PP, S1, S2 or S3, touches it (or even penetrates it slightly) and then reverses back up. A sell signal is received in the opposite scenario.
Fifth, some traders tend to trade the divergence between RSI and the price at pivot points due to the trades high risk-to-reward ratio. The trade goes as follows:
– Look for a pivot point which has continuously been withstanding the prices attempts to break it.
– As soon as the price finally manages to break it, look for a divergence between the Relative Strength Index and the market. For example, if the price breaks through the R1 and edges higher, you need to be on the lookout for a bearish divergence and vice versa.
– As soon as youve spotted the divergence, you need to wait for the price to fall back beneath the R1 and then go short. As soon as a bar closes below the R1, you enter short with a stop-loss several pips above the most recent swing high and a profit target at the nearest pivot point, which in our case will be the central pivot point.
If, for example, the market breaks through the S3, but there is a bullish divergence, you need to wait for the market to reverse and edge back up through the S3. As soon as it does, go long with a stop-loss several pips beneath the most recent swing low and a profit-target at the S2.