4.44 Range Trading With Pivot Points

 
Do you remember those days when markets functioned with old-fashioned floor traders in the outcry system? Here’s a little known fact – the floor traders would, before stepping on to the floor, note down the pivot levels for the day and use them in their trading.
 
Because it is so simple to calculate pivots, and because they are predictive instead of lagging, they are watched by traders all over the world and become important levels of support and resistance.
 
It is therefore easy to trade them as prices move between the various levels. The R1 and S1 levels are the key levels to watch when trading, as well as the most important level - pivot point. Traders generally use other resistance and support levels for profit-taking.
 
The first step is to position yourself in the direction of the trend. This is the path of least resistance and therefore the best route to pip riches!
 
This is done by comparing the previous open price with the Pivot Point level. If the pivot point is higher than the previous open price then the market trend is bullish. The second step to see if the current period's price action is trying to break over the pivot point because that will confirm the bullishness and if that is true then it is preferable to trade the longs. If the currency pair is trying to break below the pivot and the pivot point is below the previous opening level, be prepared for a bearish session and look to short at suitable price levels.
 
The next step is to watch the price behavior around the key pivot levels such as R1 and S1. 
 
Get a clue to support and resistance if the price is testing any of these levels and not breaking through. If price is holding, we can use that level to trade. Here’s how. 
 
 
Example of trading with pivot points in ranging Forex market.
 
 
In the above Forex chart, we see that the price kept finding some resistance around the pivot point but then broke out above that level. Once it broke over the high of the resistance zone, it presented an opportunity to go for a long position. We enter a buy trade, setting a stop loss a few pips below recent low, the gray line below the pivot point level. We could also be feeling extra lucky, and decide to place the stop instead just below the next lower level, i.e. level one support. We look for a chance to put the hard-earned pips in the bank by placing an exit order just below the next higher level, which is R1. 
 
As you can see, that worked out real well. Now let’s take some profits on the short side!
 
We now see a situation where the price tried to test the R1 level but faced resistance. The candles near R1 level casted bearish shadows with and that was the signal that we could go short. The price started to revert below the level. We promptly pressed the SELL! Button and went short. Stop loss was kept at the thick grey line, slightly above the R1 level. In case the resistance offered by R1 level is weak then a stop-loss can be put slightly above the R2 level. The profit target exit order entered just above the pivot point level and bingo.
 
Wow! Both those trades went straight to the bank. But that was not the end. See how the winning cycle continued for 5 times. Let's take a breath - a little pause - as 5 cycles may prove to be just too many and a breakout may be around the corner. Please do not confuse these 5 cycles as the 5-3 pattern of the Elliott Wave theory.
 
OK. That looked easy, but be mindful that the Forex market is always looking to prove us wrong, so the above levels may not hold. In that case your only savior would be your stop loss order, WHICH..WE..HOPE…YOU..HAD..IN…PLACE!
 
Of course, always look for confirmation by tying up your pivot level with other action such as candlesticks and older but tested support and resistance zones.

 

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