In trading stocks and other assets, pivot points are support and resistance levels that are calculated using the open, high, low, and close of the previous trading day. The pivot point bounce is a trading strategy or system that uses short timeframes and the daily pivot points. The system trades the price moving toward—and then bouncing off of—any pivot points.
The pivot points include:
- The pivot point itself
- Three support and three resistance points
When the price approaches a pivot point—especially for the first time in each direction—it will have a tendency to reverse. It is this reversal that is used by the pivot point bounce trading system.
The Default Trade
The default trade uses a one to five-minute open, high, low, and close (OHLC) bar chart, and the daily pivot points. Traders can then automate trades or follow and execute them manually.
Traders across the globe can use this strategy in their local time zone or make trades as they follow other markets in different time zones. Pivot point bounces are typically most profitable during a market’s busiest hours—one to two hours following an open and one to two hours before the close.
The following tutorial uses the DAX futures market, but the same steps can be used on whichever markets you are trading. The trading example used here is a short trade, using one contract, with a target of 20 ticks, and a stop loss of 10 ticks.
Open a Chart
Open a one-minute Open, High, Low, and Close (OHLC) bar chart of your market and add the daily pivot points.
Wait for the Price to Move Towards a Pivot Point
Watch the market, and wait until the price is moving toward a pivot point.
For a long trade, the price bars should be making new lows as they move towards the pivot point. For a short trade, the price bars should be making new highs as they move towards the pivot point.
Wait for the Price to Touch the Pivot Point
Wait for the price to touch the pivot point, which happens when the price trades at the pivot point price.
Enter Your Trade
Enter your trade when the high (or low) of the first price bar that fails to make a new low (or high) is broken. The following list shows the steps required for both long and short entries:
- Price bar touches the pivot point
- Subsequent price bar fails to make a new low
- Subsequent price bar breaks the high of the previous price bar
- Price bar touches the pivot point
- Subsequent price bar fails to make a new high
- Subsequent price bar breaks the low of the previous price bar
In the trade shown on the chart below, the bar that failed to make a new high is shown in white. The entry is when the subsequent price bar breaks the low of the entry bar, which is at 7217.0, with a target of 7207.0, and a default stop loss of 7222.0.
The stop loss can be adjusted to use either the pivot point as the stop loss or the high (or low) of the entry bar as the stop loss, depending upon the market being traded.
There is no default order type for the pivot point bounce trade entry, but for the DAX the recommendation is a limit order.
As soon as your entry order has been filled, make sure that your trading software has placed your target and stop-loss orders, or place them manually if necessary.
There is no default order type for either the target or stop loss, but for the DAX (and usually for all markets), the recommendation is a limit order for the target and a stop order for the stop loss.
Wait for Your Trade to Exit
Wait for the price to trade at your target or at your stop loss, and for either your target or stop loss order to get filled. The pivot point bounce trade can take anywhere from a few minutes to a couple of hours to reach your target or stop loss.
Depending upon the market being traded, the target could be adjusted to be the next pivot point, and the stop loss could be adjusted to break even at a suitable time.
The targets that are shown on the chart are at 7212.0 (10 ticks), and 7207.0 (20 ticks), both of which were filled by this trade.
If your target order has been filled, then your trade has been a winning trade. If your stop-loss order has been filled, then your trade has been a losing trade.
Repeat the Trade
Repeat the trade from step 4, as many times as necessary, until either your daily profit target is reached, or your market is no longer active.