Many people who are not into trading or are new to trading equate trading to being very difficult. I hate to break it to you, but this is partially true. Statistics say that only 10% of traders become successful. That is a hard pill to swallow.
Even though statistics say that trading is difficult, there are ways to make it a bit easier. For one, traders should find an edge. What does it mean? It means having an advantage compared to other market participants. It could come from many sources and could be developed in time. It could come from techniques, strategies, tools, or even the trader himself or herself.
One of the ways to get an edge in the forex market is with the use of tools or better known as technical indicators. Some indicators could help traders gain an advantage by helping traders find trade setups that are either high probability trades or high yield trades or even a combination of both. Weekly Pivot Point Reversal Forex Trading Strategy uses a technical indicator that most professionals use. By taking advantage of the tools that the pros use, we get to tilt the odds in our favor when trading the forex markets.
Weekly Pivot Only
The Pivot Point indicator is one of the few indicators that professional institutional traders use. In fact, many traders who trade foreign exchange for big banks would include reporting where the pivot point is during their morning huddles. Not only that but almost all institutional traders look at the same pivot point figures, especially those who are using Bloomberg workstations. This gives them a clear edge against us retail traders. For one, they know where many of the big players are going to take interest in trading big.
The Pivot Point is computed by determining the average of the high, low and close for a period. It may be a daily pivot, a weekly pivot, or even a monthly pivot.
Aside from the Pivot Point, the classic Pivot Point indicator also determines supports and resistances derived from the pivot point. These are called Support 1 (S1), Support 2 (S2), Resistance 1 (R1) and Resistance 2 (R2). All these figures have different computations, yet all of them are just as interesting as the Pivot Points.
The Weekly Pivot Only indicator is a weekly pivot point indicator which disregards the S1, S2, R1 and R2 lines. It allows traders to focus only the Pivot Point making it useful for determining trend reversals and breakouts.
Wilders DMI
Wilders DMI is a custom momentum indicator which combines three different indicators, the Directional Movement Index (DMI), Average Directional Index (ADX), and the Average Directional Movement Rating (ADXR).
This provides traders a unique vantage point since the trader could be seeing the big picture when it comes to trend, momentum, and momentum strength, all in one indicator.
Directional Movement Index (DMI) is used to determine which side of the market is stronger, the upside momentum or the downside momentum.
Average Directional Index (ADX) on the other hand is popularly used to determine the strength of a trend or a momentum.
Average Directional Movement Rating (ADXR) on the other hand computes for the momentum change derived from the ADX indicator.
A confluence of these three signals produces a powerful momentum indication.
The Wilders DMI indicator displays a histogram and a couple of lines that crisscross each other.
Lime bars indicate a bullish bias while tomato bars indicate a bearish bias. Bars that breach 20 indicate a strong momentum.
Trading Strategy
This strategy trades on breakouts on the weekly pivot point. These breakouts indicate or confirm a trend reversal coming from a trend based on the past few weeks.
However, not all breakouts or crossovers of price and the pivot point should be traded right away. Trades should be filtered based on momentum.
To identify momentum trend reversals, we will be using the Wilders DMI indicator. On the Wilders DMI indicator, the basis for a momentum trend reversal will be the changing of the colors of the histogram bars and its breaching of the 20 level.
Also, since this strategy is based on the weekly pivot point, we will be trading this strategy solely as a swing trading strategy.
Indicators:
- WeeklyPivotOnly
- WildersDMI
Preferred Time Frames: 4-hour chart only
Currency Pairs: major and minor pairs
Trading Session: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price should cross above the weekly pivot point line.
- The Wilders DMI indicator should print lime bars.
- On the Wilders DMI indicator a lime bar should breach 20.
- The corresponding candle should be a bullish momentum candle.
- Enter a buy order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as price closes below the weekly pivot point line.
- Close the trade as soon as the histogram bar changes to tomato.
Sell Trade Setup
Entry
- Price should cross below the weekly pivot point line.
- The Wilders DMI indicator should print tomato bars.
- On the Wilders DMI indicator a tomato bar should breach 20.
- The corresponding candle should be a bearish momentum candle.
- Enter a sell order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as price closes above the weekly pivot point line.
- Close the trade as soon as the histogram bar changes to lime.
Conclusion
This trading strategy is an improvement over an already working trading strategy.
Many traders trade solely based on breakouts from the pivot point and has seen good success with it.
However, trading in this manner could be a double-edged sword. Pivot points are supports and resistances used by institutional traders. As such, it could be a source of a bounce or a breakout.
In order to identify a good breakout trade setup, traders often trade only on momentum candles and usually in confluence with other factors.
Not all traders could easily identify a good momentum trade. Using the Wilders DMI indicator helps traders in identifying a strong momentum breakout. This allows us to take trend reversal setups coming from a strong breakout from the weekly pivot point.
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