As I indicated in my earlier post, I have changed the focus of my trading from straight support and resistance to a pivot point based system. What are pivot points? Pivot points (or as I sometimes call them, Pivots) are simply mathematically derived price points based on the previous period's price movement. The simple calculation for pivots for any period is to add the High, Low and Close for the previous period, and divide by three. The result is the pivot point for the current period. For example, if you are trading the GBP/JPY and are looking for today's daily pivot, you would look at yesterday's High, Low, and Close, add them together and divide by three (High=148.63, Low=146.64, and Close=147.33). In this case the calculation would result in a daily pivot point of 147.53.
What is the significance of the pivot? Quite simply, the price in a given period almost always hit the daily pivot (or comes very close). It seems as if the price of a currency pair is drawn to the pivot point. Missed pivots are rare and can themselves give rise to great trading opportunities. The way I'm trading now, for the most part, is by placing orders from the pivot point toward the current price when, on a weekly or monthly timeframe, the pivot has not yet been hit.
The order style I use is also different than the way I was trading support and resistance before. Where I would enter into a single position for and S/R trade and have a stop loss that trailed behind the price as it moved toward my profit target (a legitimate way to trade by the way), now I stack orders from the pivot point toward the price. For example, using the GBP/JPY as an example, if the weekly pivot were at 147.50 and the price was below the pivot at 146.00, I would place a buy order, starting at 147.40 every ten pips down toward the current price. I leave a little room for the price to move so that the chance of an order opening while the price is moving away from me is minimized. So, in this example, I would place 10 orders, 10 pips apart from 147.50 to 146.50 with the pivot as the profit target. Then I would wait.
That is it. That is the trading style I use most often now. I intend to post the trades I'm making here so that those of you who care to can follow along. I will also post a few additional trading tips this week so that the trading style makes more sense. I'll be talking about stops and losses in the next post.
One very important thing I need to say before signing off today is that I've spent the last 6 months or so backtesting this trading style and trading small lots to see how it works in real money situations. I encourage you to do the same. Never take someone else's word that a system works. There are plenty of tools for backtesting out there. Take the time to test these ideas, then try them using small lots. Only when you are convinced that they will work for you should you commit significant resources.