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PUTTING A PIVOT POINT FOREX TRADING STRATEGY TOGETHER
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Buy Signals

Buy signals occur when a market is in a downtrend. Then as prices zoom down near a confluence of pivot point support levels, once prices close above the moving average, and as the market closes above the most recent or up to the prior three time periods' highs, look to enter a long position on the candle that establishes the higher closing high or on the open of the next time period. Place a stop initially below the lowest low point on the candle chart. Don't get cute and try to look for a significant pullback. Once a bottom forms, generally a violent breakout triggers reaction from the crowd to join in on the action.

Using a limit order significantly below the market may result in a missed opportunity. If the entry level at the current price level appears to be too much risk in comparison to where you feel your stop order should be placed, then scale back your lot size. Once the sequence of higher highs and higher lows develops, especially if the market is near a confluence of pivot support levels, other traders will see this and enter buy orders. This order flow can spark a highly profitable reversal. Once you are in this position, you should see quick results within one or two time periods. The forex market tends to attract more-savvy, technically oriented traders who use sophisticated trading software. These are the players who will come in once they see these conditional changes or buy signals. As the trade devel ops, monitor the relationship of prices to the moving average. Not only should the three-period pivot point average act as support, but the market should close above it. If you have multiple positions on, take into account these considerations; look at the pivot point resistance targets to scale out of partial positions and then “trail” your stops on the balance. Trailing a stop means to move it up as the market moves in your favor and to adjust it to account for changes in your lot sizes. Confluences on the various time frames of pivot point support levels can lead to massive moves that allow you at times to milk what was intended to be a simple day trade into a windfall-profit swing trade.

Figure 2.19 shows a euro/yen cross based on a 60-minute chart. This was a hot cross throughout 2006 and will likely continue to be so in the years to come. The euro was outpacing the value of the yen. In other words, either the yen was declining or not moving, and the euro was advancing in value; or at times, they were both declining, but the yen was losing more value than the euro. When trading the euro/yen, the bid/ask spreads are wider in these cross-currency transactions than they are in the major pairs against the U.S. dollar. In any case, the market generated a great opportu nity as it met the criteria for a long entry.

First, the market was in a downtrend; and as prices moved toward the daily, the weekly, and the monthly pivot point confluence value area, price action started to change. The market started to close above the three period pivot point moving average, and a three-candle pattern called a morning doji star formed. In essence, we saw a shift in the condition of the downtrend. Prices closed above a prior high at the same time it closed above the moving average. It is at that time that you want to enter a market order on the close or on the next time frame's open. Your risk factor would be to place a stop below the low of the doji candle. If this price differential is too much risk, then consider cutting your lot size back. Your exit strategy can consist of several elements. You can use the end of the day; the low here was on May 17, 2006 , at 11:00 A . M . (EST). This trade gave you plenty of time to trade profitably into the 5:00 P . M . (EST) close, which was near the daily pivot point resistance level. So you have a time and a price target for your exit strategy. If you do trade with multiple positions (which you should at these confluence opportunities) even if you scale back and trade mini-lots, you have the flexibility to liquidate a portion of your positions that will ensure a profit while moving your stops up from a loss, then breakeven, and so on. This is what we define as trailing stop orders. This book will disclose a trailing stop method as well in Chapter 10.

The big questions are how long should we let a trade ride and what do we look for to help us make decisions on when to sell the balance of the long positions? First, we integrate or introduce a different and higher time frame, such as a daily chart. For this technique, let's examine Figure 2.20. This is the daily chart for the euro/yen cross. The exact low that formed on a 60-minute chart was a doji candle; the daily chart actually formed a ham mer bottom! As you can see, there is a very strong value level as identified by the confluence of the various time-frame pivot point support numbers. As prices moved higher, you can see the way the three-period pivot point moving average acted as support and the relationship of prices as the market closed above this moving average during the uptrend. The market went into a five-day rally mode as we see higher highs, higher lows, and higher closing highs right up to the following week's pivot resistance number. This resulted in a big move; and as time passed, this trend continued making new highs as I was finishing this book

Sell Signals

Sell signals are the opposite of the buy signal setups. The sell signal oc curs after the market has been in a strong uptrend. Then as prices rocket up toward a confluence of pivot point resistance levels, traders need to wait for confirmation that the bullish momentum has died as not only do prices close below the moving average, but the price action will show the market starting to close below the most recent or up to the prior three time periods' lows. That is when you look to enter a short position once the candle establishes a lower closing low. Enter a market order to sell on the close of that time frame or on the open of the next time period. Place a stop initially above the highest high point on the candle chart. Think for a moment: If prices are in a bullish condition and trending higher, is this not a conditional change when prices close below the moving average (M/A) and below the prior time period's lows, with a sequence of lower highs and lower lows? Of course, it is; and that is what makes entering a short position with this information valid, since these conditions now con firm a downtrend reversal. Figures 2.21 and 2.22 illustrate a great case study on one more popular currency cross, which is the euro against the British pound.

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