Pivot Reversal Strategy

Definition

The Pivot Point Strategy refers to taking bounce trades off of the Pivot Point. The Pivot Point points in the direction of where the asset wants to be heading next. Pivot Points are often used for day trading and market making and they are denoted with Support and Resistance levels that favor the trend an asset is moving in.

Takeaways

The Pivot Point (PP) shows a trader where support or resistance are found in real-time. The levels adjust as the price moves and gain strength as the trend increases in either direction. Pivot Points are used to quickly identify levels that matter to the market for a bounce or a rejection. Each time an asset trades at a Pivot Point (e.g. a support or resistance level) and then reverses in direction, the level continuously gets stronger.

What to look for

Pivot Point strategies range from different use cases. In this section we will highlight a few strategies that Pivot Point Reversal Strategies follow:

Long entry rule: If price starts above the Pivot Point (PP), then it is often recommended for traders to buy near the PP line as it is gaining strength or showing a clear trend higher.

Long conservative entry rule: When the market closes at x pips above the Pivot Point level, this is when a trader would most likely want the market to touch the PP line and take up a trade. This, however, is only true if the line is reliable and stable in its position and direction.

Long stop loss rule: This rule follows the idea that a stop loss order should be used for a trade if it is a few pips below the Pivot Point. In addition, it determines that a stop loss below Support 1 (S1) allows for more room for error in a trade.

Long take profit rule: This rule establishes a take profit order occurring at Support 2 (S2) and if the trade makes it to S1, then a move to a stop loss order for balance is crucial.

Short entry rule: If a market starts below the Pivot Point (PP), many traders then choose to sell near the PP line. If the line is overshot or otherwise missed and the market seems to be following a downward trend, then a trader should consider other trade moves along the short-biased PP direction.

Short conservative entry rule: This rule emphasizes the need for the market to be touching the PP line for a decent trade to be made, but only if the market closes at x pips below the Pivot Point level.This, however, is only true if the line is reliable and stable in its position and direction.

Short stop loss rule: This rule follows the idea that a stop loss order should be used for a trade if it is a few pips above the Pivot Point. In addition, it determines that a stop loss above R1 (Resistance 1) allows for more room for error in a trade.

Short take profit rule: This rule establishes a take profit order occurring at R2 and if the price reaches R1, then a move to a stop loss order for balance is crucial.

Summary

The Pivot Point Strategy refers to taking bounce trades off of the Pivot Point in the general trend direction of the market. Relative to the Pivot Point, the Pivot Reversal Strategy utilizes entry and exit rules to help determine optimal trade times and when to take bounce trades.

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