In this sequel, we shall use the same chart we used in the first part of this article to examine how pivot points can be used as entry and exit points, but this time, for short entry trades.
Let us pay attention to the right hand side of the 1hr chart for the EURCHF. We can see clearly that the multiple rejections of further upward moves at R3 indicate that a full reversal of the initial bullish run is about to take place at that level, providing a very strong sell signal. A short entry at R3 is definitely not out of place.
A short entry at R3 should have R2 (acting as a support) as a first target. In this example, the price action got to R2, stalled a bit, confirming it as a first exit target, good for 130 pips. After downward rejection at R2, a very strong bearish candle ensued which tore through R1 and closed above it (an indication that a further downward move was very possible). The next few candles attempted to retrace back to R1, but any further upward retracements were stalled at that point. R1 could serve as a second exit target, or indeed, another short re-entry for those who took profits at R2. The downward momentum continued beyond the central pivot point before dying out at S1.
There are some things that are obvious here. When you have your pivot points plotted on the chart, they immediately show you key levels of support and resistance, and because many traders are watching these levels and respect them when placing orders and exiting positions, they tend to hold.
Furthermore, the behaviour of candlesticks at these key points give a good hint of what the price action is likely to do next. If the momentum of a candle takes it beyond a key level (e.g. strong bearish candle closing below a resistance point), a further move in the candle’s momentum is very likely. If there is any retracement at all, it will usually be to the key level that was surpassed before the price action resumes the momentum in the trend of the strongly trending candle. We saw this very clearly when a bearish candle ripped through R1 and closed below it.
If you know how to use pivot points in the way we have described, they will make easy pickings for you in the Forex market.
Written by Alexander Collins, who is an owner of PipBurner Forex blog where you can download free Forex trading tools. Do you know Pivot Point calculation formula? Want to find out? Read article about Pivot Point calculation.