Pivot Point Reversal Strategy

What is the Pivot Point Reversal Strategy?

The pivot point reversal strategy is a trading approach used in the foreign exchange (forex) market. This strategy involves identifying significant support and resistance levels on a price chart, which are then used to determine potential entry and exit points for trades. Pivot points are calculated using the previous day’s high, low, and closing prices, and are used to gauge potential price movements for the current trading day. In this article, we will explore the key components of the pivot point reversal strategy and how it can be applied in the forex market.

Pivot Point Reversal Strategy

Here’s an example strategy using the pivot point reversal strategy for the forex market:

  • Determine the pivot points: Calculate the pivot points for the current trading day using the previous day’s high, low, and closing prices. The central pivot point is the most significant level, and it acts as a key support or resistance level for the day. The other pivot points are support and resistance levels that are above and below the central pivot point.
  • Identify the trend: Determine the direction of the trend by analysing the price action on the chart. If the trend is bullish, look for buying opportunities. If the trend is bearish, look for selling opportunities.
  • Wait for a price reversal: Once the trend has been identified, wait for a price reversal to occur at one of the pivot levels. This could be in the form of a candlestick pattern or a price rejection at a pivot level.

Buy Signal

pivot point reversal strategy Buy Signal
pivot point reversal strategy Buy Signal

Here are the details for a buy signal using the pivot point reversal strategy:

  • Identify the central pivot point (PP) and support levels (S1, S2, S3) below the current price on the chart.
  • Look for a bullish trend or a potential trend reversal based on technical analysis.
  • Wait for the price to reach a support level (S1, S2, or S3) and observe if it holds as a support level.
  • Look for bullish candlestick patterns, such as bullish hammer, bullish engulfing, or bullish harami, at or near the support level.

Sell Signal

pivot point reversal strategy Sell Signal
pivot point reversal strategy Sell Signal

Here are the details for a sell signal using the pivot point reversal strategy:

  • Identify the central pivot point (PP) and resistance levels (R1, R2, R3) above the current price on the chart.
  • Look for a bearish trend or a potential trend reversal based on technical analysis.
  • Wait for the price to reach a resistance level (R1, R2, or R3) and observe if it holds as a resistance level.
  • Look for bearish candlestick patterns, such as shooting star, bearish engulfing, or bearish harami, at or near the resistance level.

Pivot Point Reversal Strategy Pros & Cons

Pros

  • Objective Analysis: Pivot points are objective levels that are calculated based on the previous day’s high, low, and closing prices, making them a reliable tool for technical analysis.
  • Easy to Use: Pivot points are easy to calculate and plot on a price chart, making them accessible to traders of all experience levels.
  • Provides Support and Resistance Levels: Pivot points provide key support and resistance levels that traders can use to identify potential entry and exit points for trades.

 Cons

  • Not Always Accurate: Pivot points are based on historical price data, and may not always accurately predict future price movements.
  • May Generate False Signals: Pivot points can generate false signals, especially in volatile markets or during news events, which can lead to drawdowns.
  • May Not Work in All Market Conditions: Pivot points are designed to work in trending markets, and may not work as well in ranging or sideways markets.
  • Requires Constant Monitoring: Pivot points are calculated on a daily basis, and traders need to constantly monitor the market to identify potential trading opportunities.

Conclusion

In conclusion, the pivot point reversal strategy is a tool for identifying potential trading opportunities in the forex market. Pivot points provide traders with objective support and resistance levels that can be used to enter and exit trades. However, as with any trading strategy, there are both pros and cons to using the pivot point reversal strategy. Traders should be aware of the limitations of the strategy, including its potential for false signals and its reliance on historical price data. Overall, the pivot point reversal strategy can be a valuable tool for traders who are looking to identify potential trends and reversals in the forex market.


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