Pivot Point Break and Test Forex Trading Strategy

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Pivot Point Break and Test Forex Trading Strategy

Like in any profession, traders also use tools. This simplifies their trading process and provides objective information which traders could use to support their trading analysis. These tools are what we call technical indicators.

Technical indicators are a big part of trading for most technical traders. It allows us to read the market, identify trends and momentum, spot possible supply and demand zones, as well as probable breakout areas.

There are many different types of technical indicators. There are the trend following and momentum indicators, channel indicators, oscillators and different types of moving averages. All of these indicators have different uses and could be applied in different market conditions. These indicators also have varying degrees of effectivity. Not all indicators are made equal. Some tend to be more effective than others.

As retail traders, we seek edges that would increase our chances of profiting against the forex market. One of the best ways to improve our edge is by using the tools that many professional traders use.

Pivot Point Break and Test Forex Trading Strategy is a strategy that makes use of an indicator that professional institutional traders use.

Auto Pivot Plotter Weekly

The Pivot Point indicator is probably one of the most popular technical indicators used by professional traders. Traders from big banks would often take note of pivot point levels because they know that the market could do interesting things whenever price draws near to these levels.

A pivot point is a technical indicator used to identify mechanical support and resistance levels on the price chart. It is composed of a midline called the Pivot Point (PP), three Resistance lines (R1, R2 and R3) plotted above the Pivot Point, and three Support lines (S1, S2 and S3) plotted below the Pivot Point.

The Pivot Point is simply the average of the high, low and close of the previous period. The various support and resistance levels are computed as follows:

  • R1 = (P x 2) – Low
  • R2 = P + (High – Low)
  • S1 = (P x 2) – High
  • S2 = P – (High – Low)

These support and resistance levels are significant price points which the market respects. This is because these are static price points that institutional traders consider.

Price would usually bounce off a support or resistance level especially when price is already overextended. Price also tends to move towards these levels before consolidating. Price could also breakout of these levels. However, price would often retest the level prior to continuing the direction of the momentum breakout.

Many successful traders base their trade plans on how price reacts to these levels. They either look for breakouts or bounces from these levels. Others see it as a possible obstacle which price should overcome, so they would rather either avoid trading against these levels or do protective stop loss management once price touches these levels.

Awesome Oscillator

The Awesome Oscillator (AO) is a popular technical indicator used by many profitable traders. It is a trend following indicator used to measure market momentum.

The Awesome Oscillator is a simple technical indicator calculated based on the difference between a 5 period Simple Moving Average (SMA) and a 34 period Simple Moving Average (SMA). However, instead of using the closing price as the basis for the computation, it uses the midpoint of the bars.

The results are then displayed as histogram bars. Positive bars indicate a bullish trend bias, while negative bars indicate a bearish trend bias. The indicator also indicates the strength of the trend based on the color of the bars. Positive green bars indicate a strengthening bullish trend, while positive red bars indicate a weakening bullish trend. On the other hand, negative red bars indicate a strengthening bearish trend, while negative green bars indicate a weakening bearish trend.

Because the AO is practically based on the crossing over of two moving averages, the indicator is primarily used to identify trend direction and trend reversals. Traders could filter out trades that are not inline with its trend bias. Traders could also use the crossing of the bars over its midpoint, which is zero, as an indication of a probable trend reversal.

Trading Strategy

This trading strategy trades on breakouts of the support and resistance lines of the weekly pivot points. It uses the Auto Pivot Plotter Weekly indicator to automatically plot the pivot points.

To trade this strategy, we will be looking for markets that have strong momentum and is likely to break through a pivot point support or resistance level. We then wait for price to break through such levels and retrace back a bit after the breakout. During the retest phase price should show signs of price rejection on the support or resistance line. This is characterized by long wicks pushing against the support or resistance level. We then wait for price action to show that price is picking up momentum in the direction of the breakout. This is characterized by momentum candles.

The Awesome Oscillator is used to confirm the trend bias. Trades are filtered based on whether the AO histogram bars are positive or negative.

Indicators:

  • Auto-Pivot_Plotter_Weekly_V2_1
  • Awesome

Preferred Time Frame: 15-minute chart only

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The Awesome Oscillator bars should be positive.
  • Price should break above the Pivot Point or Support levels.
  • Price should retest the Pivot Point or Support levels.
  • Enter a buy order as soon as a bullish momentum candle completes.

Stop Loss

  • Set the stop loss below the Pivot Point or Support level.

Exit

  • Set the take profit target below the next Resistance level.

Pivot Point Break and Test Forex Trading Strategy

Pivot Point Break and Test Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The Awesome Oscillator bars should be negative.
  • Price should break below the Pivot Point or Resistance levels.
  • Price should retest the Pivot Point or Resistance levels.
  • Enter a sell order as soon as a bearish momentum candle completes.

Stop Loss

  • Set the stop loss above the Pivot Point or Resistance level.

Exit

  • Set the take profit target above the next Support level.

Pivot Point Break and Test Forex Trading Strategy 3

Pivot Point Break and Test Forex Trading Strategy 4

Conclusion

Pivot Points are unique levels on the price chart. These areas are where most of the action occurs. Price would either bounce off or break through these levels. Either way, both presents opportunities for traders to profit.

The question is if price would break through or bounce off the level. The Awesome Oscillator is a great tool to use to confirm the strength and direction of the trend. This allows us to filter out trades that are either losing momentum or are going against our trend bias.

Trading the breakout and retest method on Pivot Point support or resistance levels is a tested and proven trading method. Simply adding confirmation to the mix makes the probability of a profitable trade even better.

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