Updated: Nov 16, 2019
In finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets. The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consistency, and objectivity. (wiki)
One of the oldest, finest and widely used techniques for profitable trades is ‘Pivot Points’. This looks a bit traditional but still millions of traders use this technique to determine the overall trend. A pivot point is simply a technical analysis indicator used to determine the overall trend of the market over different time frames.
The pivot point itself is simply the average of the high, low and closing prices from the previous trading day.
- On a subsequent trading day, trading above the pivot point is thought to indicate ongoing Bullish sentiment.
- Trading below the pivot point indicates bearish sentiment.
See proper explanation of Pivot points here:
How to use it?
Steps to follow:1. Choose any stock/index and open the chart where ‘Pivot Point’ Strategy is available.
You will find ‘Pivot Point’ chart everywhere on the internet (various sources are available for free.) I have taken Prestige Estate (A Real Estate Stock which recently experienced a fresh breakout) and used Pivot point and Support/Resistance levels.
You can easily find these levels here
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, and for a short trade, the price bars should be making new highs as they move towards the pivot point.
In the above picture, you can see it at 206 Rs. levels.3. 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.4. 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
Short Trade 1. Price bar touches the pivot point. 2. Subsequent price bar fails to make a new high 3.Subsequent price bar breaks the low of the previous price bar
5. 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.
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.
The pivot point is the basis for the indicator, but it also includes other support and resistance levels that are projected based on the pivot point calculation. All these levels help traders see where the price could experience support and Resistance. Similarly, if the price moves through these levels it lets the trader know the price is trending in that direction.
Strategy for Money management:
Use “Fixed Ratio”.
Using fixed ratio, you can increase your account size from a few lakhs to a decent size. It has only 1 variable, called Delta. Delta is basically the maximum drawdown of your system. Assume you have Rs 100,000 in your account and you have found the maximum drawdown to be Rs 20000 for 1lot. You can now increase your trading size to 2 lots once the account balance goes to Rs 120,000 (profit of Rs 20,000), and so on. If the account balance goes down, you reduce the size, this is a very aggressive way.
In a fixed fractional, you basically risk no more than x% of the account balance per trade. So if your % says 2%, when the account balance is Rs 100,000 you risk Rs 2000 and if the account goes to Rs 110,000 you risk Rs 2200.
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