Definitely one of the most effective market analysis tools are pivot points . Although it is not an infallible tool, techniques based on pivot points are usually quite effective since, unlike most technical analysis indicators, such as moving averages, for example, they do not go beyond the price, ie Make the movement late. In addition, these types of strategies do not require the trader to spend all day in front of a computer viewing graphs, since they offer the option of scheduling orders of entrance or exit at certain levels predetermined by the strategies.
Here are a few simple rules we can apply to trade with the Dow Jones index based on pivot points:
Open a daily chart of the instrument with an extended schedule to project the levels of the pivot points. In this graph, in addition to the pivot points we will place the intermediate points between them, and that ‘will also be considered as reference lines for the system.
If at the beginning of the session a gap is observed at the opening (a difference between the closing price of the previous session and the closing price of the current session), we enter the market by buying at the closest pivot point if the gap is a The low and if it is up we enter also selling at the closest pivot point. However, if the gap is less than 10 points we must wait until 15:45 to enter the market.
In case the price goes up (or down) a pivot that acts as resistance (support), we can enter the market by buying (selling), closing the position when the price reaches at least the intermediate point between the pivot crossed and the next. To have a safer entry, we can place a purchase order waiting for the price to go back to the pivot that was crossed.
What is recommended in this case is to use Limit Orders. For example, if there is a pivot at 11500 that is surpassed upwards and the price reaches the intermediate point, we can place a Limit Order order about 3 points above the pivot crossed, which means that an order would be placed in 11503 waiting That there is a setback that comes to order.
If the price reaches the order and it is executed, we cover the half of the position slightly below (top) of the line corresponding to the next pivot point, while the rest we let run until slightly below (above) the line That exists next. In this case, the stop loss should be placed at about 20 points from the entrance. If the operation reaches the first profit-taking objective, we place the stop loss at the entry point minus (plus) 3 points.
If the targets are not reached and the stop loss is not executed, we close the position precisely at 22:10 CET. In addition, no more positions will be opened after 21:30 CET.
If we get to do two losing trades in a row, it is best not to open more positions based on pivot points for the remainder of the session.
As you can see, the strategy is not too complicated, but careful. The important thing is to respect the rules, especially stop loss because if the market moves against us can do it with great force.