Trading Profitably with Pivot Points?

Pivot PointsBrowsing through a trading forum on the web today, I was surprised to see a recent posting about a trading strategy which was based upon mean-reversion to a pivot point. A “pivot point” is a mathematical price which is calculated from the previous day’s price action, representing a kind of “fair” or average price for the coming day (or week, month etc. – it can be calculated over any consistent period. The idea behind the strategy was to trade towards the pivot point price when the price is away from it. So, for example, if the price starts a trading session well below the pivot point price, you are looking to enter long; if well above the pivot point price, you are looking to enter short.

It surprised me to see anyone bring up this kind of mean-reverting pivot point trading strategy. You used to see them around a lot a few years ago, in fact I remember it was promoted heavily by one very well-known Forex “educator” around 2010 / 2011, but you don’t see this kind of strategy around much these days. There is a good reason why. The strategy’s alleged edge is usually based upon the statistic that any major Forex currency pair hits its central pivot point on something close to 80% of days. This is true enough, but the problem is the entry, not the target: where to enter? Where to place the stop loss? These factors are so crucial to applying this system profitably that they make a joke of the “edge” of the pivot price being any kind of help at all. Another problem with this type of system is that you are always trading against the intermediate / medium-term trend, which makes the climb so much more uphill. It is always tempting to try to pick deep reversals, and they do look great when they come off, but the bullish edge comes when all time frames are turning bullish, statistically speaking. Be advised to avoid this kind of pivot point mean-reverting trading strategy.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment. Learn more from Adam in his free lessons at FX Academy.