4.46 Using Pivot Points to Compliment other Indicators

 

All indicators are dynamic. They follow the price-action and change accordingly. An exception to this is Ichimoku cloud where the cloud extends to the future, where the price-action has not even reached. 

 

An indicator gives a buy or sell signal and you take a trade position accordingly. Do you know at that time where you should put your stop-loss or take-profit order? In most of the cases the answer is a "no". You may estimate these levels mainly when you are trading with trend-lines, support or resistance levels or common chart patterns. In such cases pivot points can come to your aid as pivot point and the associated resistance and support levels remain static during the selected time period. If you are using daily pivot point then during next 24 hours, the resistance and support levels remain same and you can use those as your stop-loss level and profit targets.

 

Let's have a look on the following Forex chart with MACD and pivot points:

 

Pivot points on a Forex chart, complimenting a technical indicator to know stop loss and profit targets.

 

The above chart shows the price-action finding resistance in the pivot point zone. After a couple of failed attempts the price had an upward breakout and that also coincided with the bullish crossover of the MACD. A strong “buy” signal, wouldn’t you say, where the pivot point agreed to the MACD signal and increased the possibilities of further gains?

 

Now at this moment you do not know where to put your take-profit order and also your stop-loss order. MACD will only will you when it moves down for a bearish crossover. You can’t be in front of your computer screen all the time, right? Well, here the resistance levels derived by the pivot point calculation will come handy to tell you about your profit targets. You could target R1 to take profit on half of your position and target R2 for the remaining half of the position

 

Going with the above logic, your ideal stop-loss order would be slightly below the first support levels or S1. However, if you consider the profit target as the first level of resistance or R1, your risk/reward ratio would be quite poor.  Hence, the practical stop-loss was put just below the recent support level.

 

Let’s have a look on another chart where we used pivot points to complement moving averages:

 

 pivot points complimenting moving averages on a Forex chart.

 

Similar to the previous example of USD/JPY where we had used pivot point with MACD, the above EUR/USD chart shows a combination of pivot point with exponential moving averages. Please note that we used our favorite combination of 5-period and 22-period EMAs. 

 

As you can see, the bearish break of pivot point level, by the price-action, coincided with the bearish crossover of the moving averages, when 5-period EMA moved below the slower 22-period EMA. If you could have targeted the first support level to take profit on half of your position and second support level for remaining half, you could have ended up with some handsome gains. In fact the fall extended well beyond the S2 level to hit the S3 level. The stop-loss level could have been slightly above the recent resistance level as shown above.

 

  

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