Forex Strategies Resources

10# Pivot Intraday Trading System

 This is a trading system that I use primarily on the Swiss Franc (USD/CHF) in the Spot Foreign Exchange market. I will outline the system as I apply it to the Swiss Franc, hereafter known just as USD/CHF

 

WHAT YOU NEED

1. Five-minute and 1-hour charts for the forex currencies. The 1-hour chart helps define the intraday trend and the five-minute is used for entry and exit.

2. Indicators: The 9 and 18 Exponential Moving Averages on both the 5-minute and 1- hour charts. The MACD on both the 5-minute and 1-hour charts.

3. Pivots calculator or pivots calculation which provides not only the Pivot, R1, R2, S1, S2, but also the M1, M2, M3, M4 points as well. It is common to find many commodities futures traders calculate only the Pivot, R1, R2, S1, S2 points. Often, in the forex market, these minor points of support and resistance are very significant, and most of the time there seems to be no difference in their significance.

There is some difference in which 24-hour time frame to use to compute the daily open, high, low, close numbers. MG Forex begins their 24-hour day at 3 pm EST, and concludes the next day at 3 pm EST. FX Solutions‘ 24-hour day is 12 am EST until 12 am the next day. WebTrader daily charts are calculated upon 2400 GMT to 2400 GMT. Of all the times that I have reviewed to calculate the daily numbers, 3 pm EST to 3 pm EST seems to have the best consistency for the forex market. 

 


I believe the reason is because this coincides with the opening of the Australian, New Zealand markets, which technically represent the first markets of the day to open, followed by the Asian, then the European, and finally the U.S. market.

There is one exception to my usage of this time frame. At 3 pm EST, I will calculate the new Pivots based on the completed 24-hour period, and if the prices move up or down significantly during the Australian and Asian sessions so that they come close to exceeding the R2 or S2 numbers before the start of the European session, I will recalculate them at 2400 GMT (8 pm EST), or even later at 12am EST. This way I have a fresh set of pivot numbers for the European and U.S. market sessions, which I trade.

 


The latest numbers for daily volume in the Global Foreign Exchange market say that between 2 trillion and 7 trillion dollars a day change hands! This is up from the normally quoted numbers of 1.5 trillion and 2 trillion. Because of this, even time frames such as the late U.S. market hours and early Australian and Asian time frames are producing significant market movement. A year or so ago these time frames produced very little market movement, and were not usually the best times to trade, but that is changing. I trade from the Frankfurt opening (11 pm PST) or the London opening (12 am PST) to 9 am PST, the mid-point of the US market time frame. This normally produces profitable market movement.

At 11 pm PST, I see where the prices are located. Generally, they have not moved too much since 3 pm EST, and I await a fresh break of one of the pivot numbers. The times on the charts that I use for illustration purposes are Eastern Standard Time. Therefore, 2 am on the charts is the beginning of the time frame I use.

HOW THE SYSTEM WORKS

I. The Set-Up

After you have calculated the pivot numbers for the day, place horizontal lines on your 5- minute and 1-hour charts at the pivot numbers for the day, or at least as

many lines as your chart gives you room for. It should look something like this:

The lines in the above illustration represent five of the nine calculated numbers. On this five-minute chart, that was all there was room for. The nine numbers are:

R2

M4

R1

M3

Pivot

M2

S2

M1

S1

There are several basic ways to trade pivot numbers. Some look for the prices to move to the higher end, and then sell in the upper third of the scale, or buy in the lower third of the scale of numbers (S1, M1, and S2).

However, in forex, the number of pips (points) that the currency will move in a 24-hour period is usually substantial. This means that a move from the pivot or even the M2 number down to S2, M1, or S1 could represent 40 to 100 pips. If this is true, in USD/CHF, that is worth between $272 to $680 per lot traded. Therefore, to ignore the move down from this area to the projected low of the day

could represent losing out on a good opportunity.

Additionally, the currencies are the most trending markets in the world, and frequently they do not stop if they reach these lower levels. Therefore, to look to buy at these low points can be dangerous unless you have a clear reversal pattern in place, or some other criteria for a reversal being met.

Others look for a break of the pivot and trade it lower or higher to the S2 or R1 numbers, take a portion of the profit, and leave the rest anticipating a continued move to either S1 or R2. The system I use is an extension of this method of trading pivots. I will present the method in two parts. The first application is simply trading the pivots with NO INDICATORS. Then the second application is to utilize the MOVING AVERAGES and MACD. In this way, you will see that the most important aspect of the system is the relationship between price and the pivot numbers. Secondarily, and of lesser importance, are the indicators.

The reason for this is because indicators tend to lag behind the action. If you follow only indicators, you will frequently find yourself in ―NO MAN‘S LAND.‖ This is that area in the middle between two points of support and resistance. The price can either continue on to the next point or reverse and go back to where it came from. This is the worst possible place to enter a trade, and yet that is where indicator trading often puts you. The best place to enter a trade is as close to support or resistance as possible.

Obviously, if you are buying, you want to be sitting right on top of support and if selling, right below resistance.

II. The Trade

When price penetrates a pivot number, it often retraces back to the pivot, and touches it briefly. If it was support that was penetrated, and it does not move back up above it, but continues to hover just below it, there is about to be a drop in price. At the point that it retraces after dropping below support, enter a sell with a modest stop loss somewhere on the other side of the broken support line. Notice the illustration below of the USD/JPY at 2 am EST. The price had just broken below the S2 number, which was 123.38. It briefly touched the 123.38 to 123.41 area and then began to descend. As you can see, it moved down all through the European and US market sessions. 

 

This USD/JPY trade exhibits a problem sometimes encountered. Price either moves higher than the R2 or lower than the S2 number. At that point, it is best to re-calculate the numbers, or monitor the trade based on its relationship to weekly pivot numbers.

Other examples are seen below in the USD/CHF and GBP/USD. 

 

 

This GBP set-up is an example of simply buying or selling depending on which side of 1.5000 the price is at 07:00 GMT (2:00 am EST). Since the price broke below 1.5000, you would wait until it retraced back to 1.5000, and then sell. Your target would be the next pivot line which was 1.4960. If all you did was trade one set of pivots each trading session, you would have a high percentage of wins to losses, and could realistically book 20 to 50 pips on each of the 4 major currencies. (Note: Had you been using a MVA crossover method, you would have entered the market well into ―NO MAN‘S LAND.‖ The same would be true of any indicator that lags behind the market action).

III. The Indicators

I use the 9 and 18 EMAs and the MACD on both the 5-minute chart and the 1-hour chart.

As far as the moving averages go, I am able to determine the intraday trend by the moving averages on the 1-hour chart. Regarding the MACD, I only use the signal line as it crosses through 0.000 either to +0.0001 or -0.0001. In fact, I do not regard the crossing of the Signal and the MACD line on the five-minute chart.

The only line that matters to me on the 5-minute chart is the Signal line as it crosses above or below 0.000. On the 1-hour chart, I will take note of the crossing of the MACD line and the Signal line. If they are below 0.000 and they cross to the upside, I will cautiously be looking for an entry signal on the 5-minute chart. If the Signal line on the 1-hour MACD crosses back up above the 0.000 mark, I will definitely be looking for an upward move on the 5-minute chart.

I will now walk you through a trade where I first of all look to price action in relationship to the pivots, then the secondary input of the indicators.

On the USD/CHF chart below, at 11 pm PST or 2 am EST, the prices were hovering just above the pivot line, which was at 1.4943. Because of this, I was inclined to buy as it had been drifting upward in the earlier Australian and Asian sessions, until it was hovering just above the pivot. Also, I see that the MACD signal line had just crossed up above 0.000, which is an additional confirmation that strength is building to the upside. Therefore, I buy at 1.4955, and look for an initial target of 1.5008, which is the next pivot number. If it breaks this, I move my stop loss up to just below the lagging indicator (18 EMA), and continue to follow it upwards as it breaks through resistance. At about 4:30 am, you can see that the MACD and Signal lines cross to the down side. I ignore this because the prices are still well above the new support at 1.5046, and it is the 5-minute chart. 

 

At around 9:20 am, the MACD signal line crosses below 0.000. However, I check the 1- hour chart, and see that the MACD line and the Signal line are crossed upward or above 0.000. Until they cross to the downside, I continue to see this as an up-trend for the day. Remember, for the 1-hour chart, the crossing of the MACD line and the Signal line is significant to determine the trend. For the 5- minute chart, the crossing of the MACD and Signal is not meaningful. Price continues upward during the U.S. market hours, until finally hitting a high of 1.5159 for the day.

In the next example, at 2 am EST, price has moved down during the Asian session and has just recently penetrated the 1.5081 pivot number. Also, on the 1-hour chart, the MACD line and Signal line have crossed to the downside. Therefore, I am looking for a possible down move. Since the 5-minute MACD Signal line is already below 0.000, I am definitely looking to go short.

Around 2 am EST, price has retraced to the 1.5081 mark. I take note of the fact that it came close to touching the 1.5035 M2 number, but did not. Often, price will retrace and then come down again to touch the mark that was missed. I enter a sell at 1.5081 with a 30-pip stop loss. For the first few hours it is back and forth, and then it begins to move downward, hitting the 1.5035 mark, then even lower. It retraces and to touch the 1.5035 number again, and then continues even lower. 

 

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