A simple Pivot Point Strategy that uses an RSI indicator and three simple moving average lines for confirmation of buy or sell signals.
Pivot point trading strategies are used by the ‘big boys’ in the currency markets. The ‘big boys’ are the financial institutions and other big institutions with large treasury departments who trade in the markets. These groups of traders are the people that trade the biggest volumes in the currency markets and therefore the traders that cause currency prices to go up and down. This is why when prices approach pivot point support and resistance levels the price moves in the expected direction because everyone is looking at the same pivot point price charts and everyone is trading the same simultaneously in huge volumes. It is therefore extremely prudent for retail traders to follow on the coat tails of the professional traders and trade at exactly the same time and in exactly the same direction.
How to Trade a Pivot Point Strategy:
Pivot points are major support and resistance levels where there is likely to be a retracement of price. As such pivot points can serve as fairly accurate entry and exit indicators. The way pivot points are traded and what strategies suit you depends on what kind of trader you are. When trading pivot points it is best to trade currency pairs that trend. Probably the best currency pairs exchange for pivot point trading are the EUR/USD, the GBP/USD, the USD/CHF, the USD/JPY and the NZD/USD.
The first thing to do is set your pivot points on your chosen currency pair chart. You do not need to know the formula or to calculate pivot points manually as there are plenty of free pivot point calculators on the internet that you can use. Now let’s look at the EUR/USD 30 minute chart below with pivot points drawn in.
The first thing to notice is the opening candle in the Asian session on the 30th January which is circled in red. The EUR/USD price starts to fall towards the central pivot point which is the green line at 1.3174. An important point to remember is that before you trade you should always make sure that the entry point is confirmed by another indicator. The blue circle on the candlestick chart confirms the bearish sentiment with a crossover of the 5 period moving average, downwards through the 20 period moving average. Also on the Relative Strength Index the green circle shows the index crossing down over the 50 line towards the oversold area. These indicators confirm a sell condition and the trader can take a short position in EUR/USD.
The price continues to fall and passes through the central pivot point after a small bounce by the bulls. The bears prevail and the price falls towards the 1st support level which it passes through with a small bounce (the green candle) before continuing the bearish momentum. Halfway between the 1st support level and the second support level, the RSI (indicated by the blue arrow) hits the 20 oversold level and bounces up. The EUR/USD price starts to retrace towards the 1st support level. The RSI has confirmed a change in sentiment at has given a signal that the trader should close the short position. If the price continues its uptrend and the RSI and 5 MA confirms a buy condition then the trader can open a long position. He should be aware however that the 1st support level could become a resistance level and the price might retrace back down again.
This is a simple Pivot Point strategy that is used in conjunction with an RSI and 3 moving average lines (5, 10 and 20 periods) as confirmation indicators, which can be very profitable if you stick to the rules of the strategy.
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