2 MA Pivot Forex Trading Strategy

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2 MA Pivot Forex Trading Strategy

Many traders often get whipped around by the market not because they don’t know how to trade, but because they blindly chase the direction that the market is pointing them towards at that very moment. Now, this is fine if the market does not change directions for quite some time, however, often this is not case. The market could be in an environment where directions change so frequently. In these scenarios, traders could be chasing price around as price shifts and turns and goes all over the place.

A sound strategy shouldn’t be one that tries to chase price around. It should be one that has an approximate area where a trader should take interest whether be it a breakout, reversal, retrace, etc. If the thesis of the trading setup should work, the strategy should also have an approximation of where price could go, where it could find some hurdles, and if there is a substantial space for the trade setup to move around from the entry point and the closest probable hurdle, commonly known as supports and resistances. Finally, it would also be great if a trading setup could have some sort of confirmation that the trading setup is valid. This could be based on candlestick patterns, breakouts of a level, indicators, etc. Not all strategies employ a confirmation or an entry signal. Some prefer to use pending orders which often is setup prior to an entry signal. This could also work but its better to enter a trade late than to be in a trade which turns out to be an invalid setup in the first place.

Pivot Points as Areas of Interest

Pivot Points and all its support and resistance levels are a great tool to determine areas of interest. This is because pivot points are commonly used support and resistance levels which many traders use. Just as the usual support and resistance levels, if you’d observe pivot point levels, there are many instances where price would bounce off these levels and be a start of a fresh trend. This ticks off the first requirement of having an area of interest where we would anticipate trading setups. We then avoid chasing price around but instead we wait for our setups to take shape at a predetermined area, just as a hunter or a sniper would wait for its target and not chase it around.

Because pivot points have multiple levels, we also get to have an idea where the next hurdle could be. This would be in the form of the pivot point or its support and resistance levels. We could then determine if there is a substantial space for price to travel from the entry point to the next hurdle, and if the juice is still worth the squeeze. Ideally, a good trade setup should be better than 1:1 reward-risk ratio. The higher the better.

Fast Moving Average Crossovers as Confirmation

There are many ways to determine an entry signal or a confirmation of a trading setup. However, a fast moving-average crossover could also be just as good. This is because often, you would already be having a previous confirmation such as a candlestick pattern or a breakout of diagonal support or resistance. What a fast moving average does is it becomes an additional layer of confirmation to a trade setup. Think of it as having a guide pointing you towards that direction plus a GPS confirming the direction.

A pair of fast moving averages would be ideal compared to slow moving averages because it allows you to have a less lagging entry signal. You wouldn’t want to act too late because you are waiting for a slow moving average to crossover. You could be losing some pips on your profit by being too late on a trade.

Trading Strategy Concept

This strategy aims to make use of bounces off of the pivot points by using a crossover strategy as a confirmation of the bounce.

Prior to an actual reversal off a pivot point, price could stall or sharply reverse off of it. It could have a reversal pattern, whether it be a pin bar, engulfing, or whatever pattern around it. But not all traders are proficient or confident in using these patterns. What we could do however is make use of the fast moving averages as a confirmation of the reversal. We could wait for the actual crossover of the moving averages and take the trade accordingly.

Since crossovers are a bit lagging, it is also important to take note of the space from the entry and the next hurdle based on the pivot point levels. If the reward-risk ratio based on the levels is higher than 1:1, then we could take the trade.

Another advantage of using moving average crossovers is that sometimes these hurdles could be broken out of. By using moving average crossovers as an exit strategy, we could squeeze more pips out of the trade. We could also have the flexibility of exiting the trade if in case price doesn’t quite reach the next pivot point level.

To make things easier, we will be using a preset 2 Moving Average Signal custom indicator which also has arrows pointing the actual crossovers.

Indicators:

  • 2 Moving Average Signal
  • PivotWeekly

Timeframe: 1-hour chart

Currency Pair: any

Trading Session: any

Buy (Long) Trade Setup Rules

Entry

  • Price should be above the Pivot Point (PP) or any Support level (S1, S2 or S3)
  • Price should touch the Pivot Point (PP) or Support level (S1, S2 or S3)
  • Price should bounce off it and cause the moving averages to crossover and print an arrow pointing up
  • Enter at the close of the candle with the arrow pointing up

Stop Loss

  • Set the stop loss a few pips below the low of the candle

Exit

  • Close the trade as the moving averages crossover signaling the end of the trend

Sell (Short) Trade Setup Rules

Entry

  • Price should be below the Pivot Point (PP) or any Resistance level (R1, R2 or R3)
  • Price should touch the Pivot Point (PP) or Resistance level (R1, R2 or R3)
  • Price should bounce off it and cause the moving averages to crossover and print an arrow pointing down
  • Enter at the close of the candle with the arrow pointing down

Stop Loss

  • Set the stop loss a few pips above the high of the candle

Exit

  • Close the trade as the moving averages crossover signaling the end of the trend

Conclusion

Pivot Point reversal strategies are standalone strategies that many traders use. Fast moving average crossovers are also standalone strategies that traders use. However, as a standalone strategy, these strategies tend to have lower win ratios with higher reward-risk ratios. They could work as a standalone strategy, but by combining both strategies, we not only get the benefit of having high reward-risk ratios but also improve accuracy of our setups.

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