Pivot Points with Shooting Star Reversal Pattern Forex Strategy
You’ve probably heard of horizontal supports & resistances. You’ve probably traded using it and have had some success with it. Horizontal supports & resistances manually drawn on the chart are good. Price usually does respect them. The setback with manually drawn supports and resistances though is that they are subjective, and is prone to an individual trader’s bias. What may be a horizontal support to you may not be a horizontal support for me. Now, that bias may be very innocent, but this subjectivity may mean that traders are not agreeing on where price should bounce off. This means that as an individual trader, having your own subjective take on the chart, though you may think you are right, but the market may have a different take on where price should bounce off.
The Pivot Points
This is where Pivot Points come in. Pivot Points are mathematically derived prices, which draws horizontal supports and resistances on the chart. Being that pivot points are mathematically derived means that the subjectivity of deciding where the support and resistance areas should be, is lessened. This takes out the stress of wondering if you are right or wrong, and conveniently draws a horizontal supports and resistances for you. On top of it, many institutional traders also use it, making it more effective, as the big players are also using it.
The yellow and red lines are the pivot points. If you would have noticed, price does respect the areas around it, bouncing off whenever it is in the area.
Shooting Star Reversal Pattern
The shooting start pattern is a reversal pattern indicating a strong rejection of price. It could also indicate a price top in an uptrend. This conveniently allows the trader to enter the market at its peak in a bearish trade setup.
Shooting star patterns are easy to identify. These are candles with a long wick on top and a very small body at the bottom found during bull trends. This signifies the end of a bull trend.
Entries Using Pivot Points and Shooting Star Patterns
Since pivot points are areas where price usually reverses, and shooting star patterns are reversal patterns, our entries will be based on shooting star patterns occurring near pivot point areas.
On the chart above, the signal candle did touch the pivot point line and reversed.
The Stop Loss
The stop loss should be placed above both the entry candle and the pivot point. In this chart however, since the entry candle did touch the pivot point, the stop loss is automatically above the pivot point. The reason for this is that since we are basing our reversals on pivot points, we are assuming that price wouldn’t be retracing beyond the pivot point anytime soon.
Take Profits with 2:1 Risk-Reward Ratio
Usually, traders using pivot points would target the next pivot point area as their take profit. Although it is common that these take profit levels are hit, I find it illogical since pivot points are supports and resistances. These are areas where price bounce off, not areas that attract price. Though it does happen that price get to those levels, but these usually happens only if price bounced off an outer pivot point, such as S2 and S3 or R2 and R3.
So, if we rule out the pivot points as target areas, what should we be using?
I prefer using a fixed ratio of 2:1 of my risk as my take profit. What this means is that if I am risking 1 pip for my stop loss, then I should be gaining 2 pips on my take profit. This gives me a positive risk-reward ratio. The advantage of this is that even if I get stopped out 50% of the time and have winning trades only 50% of the time, I’d still have a growing account. This is because every time I lose, I lose only 1 pip, and every time I win, I gain 2 pips.
On this chart, I risked 9 pips on my stop loss, so I set my take profit to gain 18 pips if it was hit. Good thing the take profit target was hit.
Conclusion
Using pivot points as an area to look for reversal patterns is very effective, since price usually respects these areas as support and resistance. However, without adequate knowledge of price action and reversal patterns, it would be hard to predict when price will bounce back. Using shooting star patterns, a very strong reversal pattern, as our trigger allows us to anticipate when price would be reversing. Combining the two, pivot points and shooting star patterns, makes these setups very effective. Combine it with a good money management strategy, such as trading 2:1 risk-reward ratio, would allow traders to trade on profit and grow their accounts.
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