The Pivot Point Reversal & Continuation Strategy is a popular trading approach that uses Pivot Points to identify key levels of support and resistance and determine potential market reversals or trend continuations. Pivot Points are widely used by traders to highlight areas where price is likely to change direction. This strategy takes advantage of these points to make informed decisions about market entries and exits, relying on both reversal and continuation patterns to capture profitable trades.

What is the Pivot Point Reversal & Continuation Strategy?

The Pivot Point Reversal & Continuation Strategy incorporates both reversal patterns and continuation patterns around pivot points to predict how price will behave once it reaches specific levels. Pivot points are calculated based on the previous day’s high, low, and close prices and are widely used to predict price levels for the current trading day.

• Reversal Strategy: This part of the strategy focuses on detecting potential price reversals when the price approaches a key support or resistance level identified by the pivot points. A reversal suggests a change in the current market trend, and traders look to profit from these potential trend shifts.
• Continuation Strategy: On the other hand, the continuation strategy focuses on identifying price movements that are likely to continue in the same direction after touching a pivot point. Continuation patterns signal that the current trend will persist, and traders look for opportunities to ride the trend for as long as it continues.

By using pivot points to identify significant price levels and combining them with reversal and continuation signals, traders can make informed decisions about whether to go long (buy) or short (sell) in the market.

How Does the Pivot Point Reversal & Continuation Strategy Work?

The strategy involves several steps: identifying pivot points, recognizing reversal and continuation patterns, and executing trades based on the expected price action. Below is a breakdown of how this strategy works:

1. Calculate Pivot Points:

The first step is to calculate the pivot points, which are typically calculated using the following formula:

• Pivot Point (P) = (High + Low + Close) / 3

Once the pivot point is established, the key support and resistance levels are calculated as follows:

• Resistance 1 (R1) = 2 * P – Low
• Support 1 (S1) = 2 * P – High
• Resistance 2 (R2) = P + (High – Low)
• Support 2 (S2) = P – (High – Low)

These levels give traders the critical points to watch throughout the trading day, as they represent where price could potentially reverse or continue.

2. Identify Reversal Patterns at Key Pivot Levels:

Reversal patterns form when the price approaches a key support or resistance level but fails to break through, instead reversing direction. Common reversal patterns that traders look for at pivot levels include:

• Candlestick Patterns: Reversal candlestick formations such as Doji, Hammer, Engulfing, and Morning/Evening Star can indicate a potential price reversal.
• Divergence: A divergence between price and an indicator like the Relative Strength Index (RSI) or MACD can signal that the price will reverse once it reaches a pivot point.
• Reversal Confirmation: Once the price reaches a pivot point (either resistance or support), traders will look for confirmation from technical indicators such as the RSI (for overbought/oversold conditions) or MACD (for crossovers) to confirm the reversal.

For example, if the price reaches a support level (S1) and the RSI shows oversold conditions, a bullish reversal is likely, and traders would look for a buying opportunity.

3. Identify Continuation Patterns:

Continuation patterns occur when the price reaches a pivot point level and breaks through, continuing in the same direction. Key continuation patterns include:

• Breakouts: A breakout above a resistance level (R1 or R2) or below a support level (S1 or S2) indicates that the trend is likely to continue.
• Flag and Pennant Patterns: These patterns indicate that a market is consolidating before the trend continues.
• Trend Indicators: Using Moving Averages (MA), such as the 50-period and 200-period MA, can help identify whether the trend is likely to continue. For example, a price above both the 50-period and 200-period moving averages suggests a bullish continuation.

In the case of a continuation, if the price breaks through a resistance level (R1 or R2) with high volume, traders may enter a buy position, expecting the price to continue moving upwards. Similarly, a breakdown below a support level (S1 or S2) can trigger a short signal.

4. Trade Execution:

Once the trader identifies the type of market condition (reversal or continuation), trade execution follows:

• Reversal Trades: For a reversal at support, a buy order is placed when the price starts moving away from the support level. For a reversal at resistance, a sell or short order is placed when the price starts moving away from the resistance level.
• Continuation Trades: When a breakout occurs at the support or resistance level, traders enter the market in the direction of the breakout. A buy order is placed after the price breaks resistance (R1 or R2), and a sell or short order is placed after the price breaks support (S1 or S2).

5. Risk Management:

Effective risk management is crucial when using the Pivot Point Reversal & Continuation Strategy. Some of the common techniques used in this strategy include:

• Stop-Loss Orders: Placing stop-loss orders just beyond the pivot points can help manage risk. For instance, in a reversal trade, a stop-loss can be set just below the support level or above the resistance level, depending on the direction of the trade.
• Take-Profit Orders: Setting take-profit orders at the next key support or resistance level ensures that traders lock in profits at predefined levels. For continuation trades, the next level of support or resistance becomes the target.

6. Trade Management and Monitoring:

After executing the trade, ongoing monitoring is necessary to ensure that the market moves in the desired direction. Traders should continuously assess the price action, adjust stop-loss and take-profit levels as necessary, and manage trades based on the evolving market sentiment.

Pros and Cons of the Pivot Point Reversal & Continuation Strategy

Pros:

1. Clear Entry and Exit Points: The strategy provides well-defined levels for entering and exiting trades based on pivot points, making it easier to manage trades.
2. Versatility: The strategy can be applied across different markets, such as forex, stocks, and commodities, making it versatile for various trading styles.
3. Risk Control: By setting stop-loss and take-profit levels based on pivot points, traders can manage their risk effectively.
4. Adaptability: The strategy works in both trending and range-bound markets, as it allows traders to profit from both reversals and continuations.

Cons:

1. False Signals: In highly volatile markets, pivot points can be broken without significant trend continuation or reversal, leading to false signals.
2. Market Noise: In choppy or sideways markets, price may hover around pivot points, causing multiple false breakouts or reversals.
3. Dependence on Other Indicators: The success of the strategy often requires confirmation from other technical indicators (e.g., RSI, MACD, or candlestick patterns) to reduce the risk of false signals.

Key Considerations for Traders Using the Pivot Point Reversal & Continuation Strategy

1. Timeframe Selection: The strategy is most effective on shorter timeframes, such as 15-minute, 30-minute, or 1-hour charts, where pivot points are more likely to offer reliable entry and exit signals.
2. Confirming Indicators: Always use additional indicators, such as RSI or MACD, to confirm reversals or breakouts, reducing the risk of false signals.
3. Volatility Consideration: Be mindful of market volatility. In high-volatility environments, pivot points may need to be adjusted or used with caution, as price movements can be more unpredictable.

Conclusion

The Pivot Point Reversal & Continuation Strategy offers traders a structured approach to entering and exiting trades based on key support and resistance levels. By combining reversal and continuation patterns with pivot points, traders can make well-informed decisions about potential market movements. However, it’s important to manage risk carefully and confirm signals using additional technical indicators.

If you’re interested in learning more about advanced strategies and how to incorporate pivot points into your trading approach, explore our Trading Courses for expert-led insights and strategies tailored to different market conditions.