With any trading method you absolutely must have a set of rules to abide by, these rules set boundaries for your trading activities and helps to limit your emotional input whilst trading.  They will also help keep your trading structured. The following are the rules that I have in place for the Pivot Point Methodology I am working with currently.

RULES.

1. Anything can happen

What this means is the market can go anywhere it likes, so don’t become fixated on a specific direction because you have seen a particular signal or pattern. The market may not agree with your analysis and do the exact opposite for whatever reason so always keep an open mind and be prepared to change your oppinion.

2. Always use a stop loss order

This should be pretty self explanatory but never and I do mean never put on a trade without putting on a stop order at the same time. There is literally only one thing that we have any control over in the markets as a trader and that is our level of risk, this risk is our stop order and without a stop we have unlimited potential for loss so just use them.

3. Two strikes and your out

For me if I have two losing trades that’s it for the day I stop trading and close down my platform and go do something else.  For me after two losing trades I feel I can be mentally off my game and may not see things as clearly as I should. Also it is much harder coming back from 3 or even more losses. This helps me to protect my capital and allows me to not become to emotionally battered so I can get up the next day and trade with a clear head.

4. Set trading hours

I have specific trading hours and only trade within them, my trading hours are between 2am EST and 10am EST. Why these hours, well because I catch the Frankfurt open, the London open and the New York open.  These are in my opinion the best times to trade as that is when new players are coming into the market and is a great time to capture reversals in the current trend or continuations of the current trend as these new players all  get aboard the action.

5.Only use my specific signals to get into the market

In other words in my methodology I have specific signals that I look for to get into the market, an example of this would be a pin bar so the trick is to only use these specific signals  for my entries.  I usually get myself into trouble when I act on feelings or hunches about the market and this generally results in further losses.

6.Protect profits and move stops to break even

I am quite aggressive at moving my stops to break-even as I would much prefer to get stopped out for nothing than take a loss.  Yes sometimes the trade then goes your way and reaches your profit target SO WHAT I didn’t lose any money so I am happy. There will always be another trade so don’t ever forget that.

My philosophy is that the best trades go your way immediately and never look back, these are the trades that I endeavor to capture and am happy to get stopped out some times for nothing rather than take a loss.  This for me is quite discretionary but a good rule of thumb would be that when in profit the equivalent of your stop amount then move the stop to break-even.

7. I don’t have to trade every day

There will always be another trade so it is not necessary to trade every day, every so often I just take the day off and do something else and this generally refreshes me and lets me start the next day with a clear mind.

8. Trail stops with a portion of every trade

I have lost count of the number of times I have exited a trade for profit to only watch it go another 150 pips in my direction. By using a trailing stop on a portion of your position you can potentially capture a larger portion of these moves. Just think TREND DAY.

9.Always take profits

I always have a take profit order in place and never hesitate,  just take the profits as that is what it is all about, making money.

10.One win and your done

As soon as I have one winner on the table for the day I am done, no more trading until the next day. Where there is a partial position with a trailing stop it just handles itself and requires no input from me.  The reason that I do this is it prevents me from giving back my profits for the day.  This is a personal thing that I have found has really helped my trading and my profits.

Relax and Enjoy

This is not one of my rules more of a mantra I suppose.

Do it cause you love it that’s my motto.  If your not enjoying it then the chances of you being successful are highly unlikely.

Trade Well

Perry

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Here is a perfect trade example using pivot points, in the following chart you can see how the huge pin bar formed at the R3 level clearly rejecting it and indicating the potential for a reversal in price.

To mange this trade I take two positions to divide up my risk, on eighty percent of the position I set the take profit at the next pivot which in this case was the R2 pivot which was at 1.4891.  On the other twenty percent of the position I set a trailing stop in anticipation of the possibility of a trend day.  I have previously added this into my back testing and the results have proved to be quite good.  There are many times when the market just takes off and never looks back,  it is these times that a strategy like this can really capture some great profits.

You can just imagine my surprise when I awoke this morning to find that I am still in this trade due to this strategy and currently up 140 pips.

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Where will this trade go?  Well your guess is as good as mine and the best strategy I have found is just let the trailing stop do its work and I get stopped out when it is touched.  The market can do anything and go anywhere and there is always the possibility that we could see a second or subsequent trend day and capture a portion of it also.  This is where I just have to be patient and let the trade play out.

Look closely at the following chart and take notice how price reacts to these pivot points, you will notice at every level there is profit taking and further trading opportunities if you were that way inclined.  You can clearly see profit taking happening at the R1, CPP and the S1 and S3 levels.

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These pivot points are extremely powerful and if you are a day trader and you are not currently using them I would seriously recommend you place them on your charts and just see how accurate and predictive they are, you may be quite surprised.

I have been doing a lot more back-testing on this trading system and will update this info in my next post.

Trade Well

Perry

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Two trades were taken overnight, the first is circled in the previous image where you can clearly see how price formed a near perfect twin tower pattern right on the S1 pivot point. This trade was then stopped out an hour later for a loss of 24 pips.  This is profit taking happening as many other like minded traders who were previously short are taking profits at the pivot point. There is no way to distinguish the difference between this profit taking and a reversal which was what I anticipated this price action to be.  This is all just a part of trading and the reason why I use stops.

The second trade for me happened two hours later and was initiated after price confirmed that it was unable to significantly penetrate the S1 pivot point.  Here is a chart to help explain what I was seeing at the time.

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Price formed a spinning top just below S1 and was then followed by some solid buying as price pushed cleanly up through the pivot and closed well above it.  This was still not enough to get me into a trade though, it was the following price action that got me aboard the move.  It was when price retraced to the pivot and then clearly rejected it with the 2 spinning top/pin bar style candles that I entered the move. It was these buyers entering the market that finally convinced me that the odds favoured a move to the upside.

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Half of the position was taken of at the daily open for 50 pips and the stop was moved to break even. The remainder of the position was taken off at the central pivot point for 101 pips, this was a good days trading and the predicative power of the pivot points was plain to see on the day I feel. Pivots are one of the few leading indicators out there and if you do day trade and you are not using them it might be wise to put them on you charts and observe how price reacts to them, you may be pleasantly surprised.

Trade Well

Perry

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When the first twin tower reversal pattern formed which was straddling the central pivot point and also clearly rejecting the daily open line I figured this was a good place to get short.  The price action that ensued to say was volatile is an understatement, price came all the way up to the daily open with a lot of momentum and at the time I figured this trade is dead in the water.

It then dropped again rapidly to ultimately form another reversal pattern an evening star pattern, this back and forth price action went on for the next couple of hours.  Price ultimately formed a pennant and eventually broke down and ran all the way to S1. What kept me in the trade was the continuing formation of reversal patterns which indicated to me that price would eventually go down, also the fact that all this was happening below the daily open was extra evidence supporting my analysis.

Note that all these areas that I am talking about being support or resistance are just that AREAS.  It is not a line in the sand, I look for price action in relation to the area and take action accordingly.  Price sometimes comes up short of the area and other times pushes right through before reversing, this is where discretion comes into it and a lot of practice. practice, practice, practice.

This is something I think a lot of people don’t consider when trading, I feel they think once they have a system they are good to go but I think that implementing these things still requires a lot of practice. For example just because Tiger Woods new how to play golf did not make him the best in the world. Lots and lots of practice made him the best in the world.

This is where I use ForexTester2 as it allows me to practice and hone  my skills a lot more than any demo account ever will. For example the trade I just discussed here happened over an eight hour period, with ForexTester2 I can cover a couple of years of data and thousands of trades in this time,  this equates to much more  experience and price action analysis. Trading is like any other skill to stay in form you need to practice your skills all the time too stay on top of your game.

Trade Well

Perry

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It is amazing just how predictive these pivot points are.  Check out the following charts and notice just how price reacts to these points, here you can see how price opened for the day and ran up  to the central pivot point where it formed an enormous Doji and then reversed and dropped like a brick all the way back down to the previous low.

Note how price was unable to close above the central pivot point and then just collapsed back down to the  most recent significant support level.

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The price action that followed was just as impressive.  Look how price consolidated at the support level of 1.4240 and see how price formed a bullish engulfing pattern followed buy an inside bar. The combination of these two patterns and the support level should be enough for any trader to take a long position.

The action that followed was even more  impressive, price ran up and through the central pivot only to retest the pivot level and then run straight up to  S1  for a total distance traveled  of 220 pips.  For these levels to hold so well it tells me that there must be an awful lot of traders using these levels and I would hazard a guess that many of these traders are trading quite substantial accounts.

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My goal here is to ride on the shirt tails of these traders. I don’t have to capture the whole move only a piece of it.  These levels definitely help with the decision making process when it comes to deciding whether to take a trade and also where to take profits.

Trade Well

Perry

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I just want to touch on the tools that I am using to trade the 15 min chart, this style of trading is based around support and resistance. The tools I am using are

1. Pivot Points
2. Horizontal support and resistance which is based on previous highs and lows
3. Candlestick patterns
4. Daily open

I am primarily watching how price reacts to the pivots and previous areas of support and resistance.  If i identify a rejection of a level by a reversal pattern or price momentum away from the area I will initiate a trade.  I simply use the next level of S and R or the next pivot point for my target.

This is a very simple trading method and is amazing just how effective it is. Over night saw some great examples of this style of trading and just how effective it can be.  Notice on the chart below how price moved between these areas.

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One of the great things about this type of trading is you don’t have to sit at the screen all day.  You can set up alerts from your platform to your phone that let you know when price is near any of these points.  I give it 20 pips before the Pivot Point as a rule, this gives me plenty of time to get to my screen and get a handle on the price action and prepare for a possible trade.

Perry

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For any of you that are unfamiliar with the term Cable it is often used in reference to the GBP/USD pair.  I found this explanation for it online:

Transatlantic cables are cables that have been laid along the ocean floor to connect North America and Europe. Before the advent of radio, the only means of communication across the Atlantic Ocean was to physically connect the continents with a transatlantic telegraph cable, which was operative in 1867. The exchange rate between the United States dollar and British pound is still colloquially known as “cable” by financial marketeers on account of the fact that the rate was originally transmitted via a transatlantic cable.

I am not sure if this is the actual reason but sounds reasonable to me so I will go with it anyway.

I recently read a book buy S&P trader Larry Levin called emotion free trading, this is only a short book and makes some really valid points about trading and some new ways for me to approach it. One of the things that really got me thinking was just how much Larry stresses taking profits, limiting risk and mange your risk and emotions.

His ideas here really got me thinking about trading the lower time frames and how I have always struggled with it and thus I trade the higher time frames instead. Larry talks about moving stop losses to break even as soon as is feasible. Now this has always been an issue for me as I see so many times price come back and retest my entry level and then go on to reach my profit target.  But what Larry says is very valid, better to get stopped out than take a loss.  This is extremely true as the only thing we have any control over in trading is our risk and by doing this we can mange our risk very aggressively.

When I think about it, how many great traders have stated that the best trades go your way straight away and never look back and that made me think hey if you apply this to your trading you are only targeting the best trades and that is what I have started doing.

I figure since the Cable is the main currency that I trade then I will start a new category named after it and start recording my research here.  My testing that I have done on ForexTester2 to date is looking very promising.  The testing that I am doing is based on trading the cable on the 15 min time frame and using Pivot Points for support and resistance. I have only covered 18 months worth of data but am happy with the results so far. This is still a lot of ground to cover as we are talking 390 days of trading so far.

This is still not enough for me to commit money to yet but my plan is to finalize my testing and then go live with the new strategy if it continues to show the same and consistent form.  I have attached a chart of the equity curve to date for your perusal and as you can see the results do look very good so far.

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Trade Well

Perry

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