Trading the Pivot Points

When it comes to trading pivot points, it logically bears many similarities to regular support/resistance trading.

We have already noted that the central pivot point usually sets the sentiment tone for the day and therefore indicates whether 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.

The pivot points serve as a reliable guideline for setting your stop-loss and take-profit orders, as the price is expected to halt and reverse at these levels.

Penetration through pivot points produces primary and secondary entry signals, the latter being even more reliable. For example, when the price is rising and runs through the R1, risk-prone traders can enter long as soon as a bar closes above the R1. Risk-averse traders who prefer confirmation may wait for the price to pull back to the R1 and see whether it rebounds – i.e. whether it switches roles and acts as support. If it does, this generates a secondary long-entry signal, while the breakout itself is the primary one. Secondary entries are generally more reliable than primary ones.

If the price doesn’t manage to break through a pivot point and the pivot point therefore fulfils its role as 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 upwards. A sell signal is received in the opposite scenario.

Some traders trade the divergence between the RSI and the price at pivot points because the trade’s high risk-to-reward ratio is attractive. The approach is as follows:

– Look for a pivot point that has consistently withstood the price’s 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 should look for a bearish divergence, and vice versa.

– As soon as you’ve spotted the divergence, wait for the price to fall back below the R1 and then go short. Once a bar closes below the R1, 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 this case is the central pivot point.

If, for example, the market breaks through the S3 but there is a bullish divergence, wait for the market to reverse and push back above the S3. Once it does, go long with a stop-loss several pips below the most recent swing low and a profit target at the S2.