The Woodie’s Pivot Points Strategy is a unique variation of traditional pivot point analysis that was developed by trader Ken Wood. It focuses on calculating pivot points in a way that places more emphasis on the closing price than the high and low prices, making it particularly useful for intraday traders who want to better understand potential turning points in the market. The strategy can help traders identify key levels of support and resistance while providing clear entry and exit points for trades.

Unlike the standard pivot point formula, which equally weighs the high, low, and close from the previous day, Woodie’s method prioritizes the closing price, believing that the close has a stronger influence on market sentiment than the high and low.

What is Woodie’s Pivot Points Strategy?

The Woodie’s Pivot Point Strategy modifies the traditional calculation of pivot points to reflect a more market-sensitive approach. In this method, the pivot point is calculated using the previous day’s high, low, and close, but the closing price is given more weight. The formula for calculating Woodie’s pivot points is:

• Pivot Point (P) = (High + Low + 2 * Close) / 4

This formula gives more importance to the closing price, which is seen as the most significant price of the day due to its reflection of the market’s final sentiment. The rest of the calculation for resistance and support levels remains similar to traditional pivot point calculations.

• 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 pivot points help identify potential price reversal points, as well as key support and resistance levels for intraday trading.

How Does the Woodie’s Pivot Points Strategy Work?

The Woodie’s Pivot Points Strategy is based on understanding the relationship between the calculated pivot points and price action. The key focus is on using the pivot point and the support/resistance levels to assess market sentiment and identify high-probability trade setups. Here’s how it works:

1. Calculate the Pivot Points:

As with traditional pivot points, the first step is to calculate the pivot point (P) and the corresponding resistance and support levels. In Woodie’s method, more weight is placed on the close of the previous period, reflecting a more accurate market sentiment.

• Pivot Point (P) = (High + Low + 2 * Close) / 4
• Resistance 1 (R1) = (2 * P) – Low
• Support 1 (S1) = (2 * P) – High
• Resistance 2 (R2) = P + (High – Low)
• Support 2 (S2) = P – (High – Low)

Once calculated, these pivot points will serve as key levels of interest throughout the trading day.

2. Price Action Relative to the Pivot Points:

The strategy primarily focuses on how the price behaves relative to the pivot point (P), and the first levels of support (S1) and resistance (R1):

• Price Above the Pivot Point (P): If the price is trading above the pivot point, the market is considered to be in a bullish trend, and traders can look for buying opportunities at key support levels (S1 or S2).
• Price Below the Pivot Point (P): If the price is trading below the pivot point, the market is in a bearish trend, and traders can look for selling opportunities at key resistance levels (R1 or R2).
• Price Within the Pivot Range: If the price is within the range of the pivot point (P), support (S1), and resistance (R1), the market is neutral, and traders should wait for a breakout to occur either above R1 or below S1 to enter a trade.

3. Breakout Trading:

The Woodie’s Pivot Points Strategy is effective for breakout trading, where traders look for price to break above resistance or below support:

• Bullish Breakout: A breakout above R1 (or even R2) indicates that the market is in a strong uptrend, and traders can enter long positions. A stop-loss can be set just below the pivot point or the breakout level.
• Bearish Breakout: A breakout below S1 (or even S2) signals a strong downtrend, and traders can enter short positions. A stop-loss can be placed just above the pivot point or the breakout level.

Breakouts that occur with increasing volume add further confidence to the trade, as volume confirms the strength of the breakout.

4. Reversal Trading:

The Woodie’s Pivot Points Strategy can also be used for reversal trading at key pivot levels, especially in range-bound markets or when price is bouncing between support and resistance levels.

• Bullish Reversal at Support: If the price approaches S1 or S2 and shows signs of a reversal (e.g., bullish candlestick patterns such as a hammer or engulfing candle), a long position can be entered, with a stop-loss below the support level.
• Bearish Reversal at Resistance: If the price approaches R1 or R2 and shows signs of a reversal (e.g., bearish candlestick patterns such as a shooting star or bearish engulfing), a short position can be entered, with a stop-loss above the resistance level.

5. Risk Management and Trade Exit:

As with any trading strategy, effective risk management is crucial. Traders should set stop-loss orders at logical levels, such as below support levels for long trades or above resistance levels for short trades.

• Take-Profit Targets: Take-profit levels can be set at the next pivot point (R2 or S2) or based on the expected price movement from the pivot points.
• Trailing Stop: In trending markets, traders can use a trailing stop to lock in profits as the price moves in their favour, adjusting the stop-loss as the price moves further from the pivot point.

6. Confirmation with Other Indicators:

To enhance the accuracy of trade entries, the Woodie’s Pivot Points Strategy can be used in conjunction with other technical indicators:

• RSI (Relative Strength Index): RSI can help confirm overbought or oversold conditions. For example, if the price is approaching resistance (R1) and the RSI is above 70, it indicates overbought conditions and a potential reversal.
• MACD (Moving Average Convergence Divergence): MACD can help confirm the strength and momentum of the trend, especially when used in combination with the pivot levels.
• Volume: A breakout accompanied by an increase in volume provides confirmation that the breakout is valid and likely to continue.

Advantages of the Woodie’s Pivot Point Strategy

1. Emphasis on Close Price: By placing more emphasis on the closing price, the strategy reflects market sentiment more accurately and can be more relevant in volatile conditions.
2. Clear Support and Resistance Levels: The strategy provides well-defined levels for entry, stop-loss, and take-profit, making it easy for traders to set up trades.
3. Effective for Breakout and Reversal Trading: The strategy works well for both breakout and reversal trading, offering versatility depending on market conditions.
4. Risk Management: Traders can use the calculated support and resistance levels to manage their risk effectively, setting stop-loss and take-profit levels at key points.

Key Considerations for the Woodie’s Pivot Point Strategy

1. Market Conditions: The strategy works best in trending markets or when there is a clear breakout. In sideways or choppy markets, pivot points may not be as reliable.
2. False Breakouts: There is always the risk of false breakouts, especially in volatile or low-liquidity markets. Traders should use other indicators to confirm signals and reduce the risk of false breakouts.
3. Timeframe Selection: The strategy works effectively across different timeframes, but intraday traders may find it particularly useful on shorter timeframes such as the 15-minute, 30-minute, or 1-hour charts.
4. Patience Required for Reversals: The strategy requires patience for reversals to develop at key support or resistance levels. Waiting for confirmation, such as candlestick patterns or momentum indicators, is essential for successful trading.

Pros and Cons of the Woodie’s Pivot Point Strategy

Pros:

1. Market Sentiment Reflection: By prioritizing the closing price, Woodie’s pivot points offer a more accurate reflection of market sentiment.
2. Clear Trade Levels: The strategy provides clear entry, stop-loss, and take-profit levels, which makes it easier for traders to set up trades.
3. Versatility: It works well in both trending and range-bound markets, providing flexibility in different market conditions.
4. Effective Risk Management: The use of pivot levels for setting stop-loss and take-profit orders helps manage risk effectively.

Cons:

1. False Breakouts: Like any breakout strategy, there is the risk of false breakouts, particularly in volatile or low-volume markets.
2. Requires Patience: Waiting for price action to confirm reversals at support and resistance levels requires patience, especially in choppy markets.
3. Complex for Beginners: The strategy may be complex for beginners who are not familiar with pivot point calculations or market price action.

Conclusion

The Woodie’s Pivot Point Strategy is a powerful trading approach that provides clear levels of support and resistance based on the closing price, which more accurately reflects market sentiment. By using the Woodie method, traders can effectively identify breakout and reversal points, manage risk, and make informed trading decisions. However, like all strategies, it is essential to combine this method with other technical indicators and proper risk management to maximize its effectiveness.

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