A scalping strategy using pivot point magnets

This scalping strategy uses the concept of stop hunting to collect small moves around pivot point levels.

These levels can act like powerful magnets, pulling price action into them. All we need to do is use this power to get our profit targets hit again and again …

First, let’s look at what pivot points are …

Pivot points are daily levels you can draw onto your chart based on the previous day’s high, low and close prices. I won’t go into the calculation here (you can find more details in this post), because most charting packages will automatically draw these in for you.

They usually take the form of five lines – the central pivot point, two resistance levels above it and two support levels below it.

They’ll look something like this …

What you’ll probably notice on this chart is how the price hugs these levels, but moves quite quickly between them. Of course, this isn’t always the case, but if you scroll through some historical charts, you’ll see how often it actually does happen.

What’s going on here?

Well, pivot points are support and resistance levels. Many traders will use them for positioning stops and profit targets, so the areas around them are littered with these orders.

The result is that as you move between pivot points, you’ll get some acceleration of price movement. But as you move away from these levels, you’ll find them ‘sticky’ as many orders are getting taken out.

And this gives us our scalping opportunity …

As prices approach a pivot level, the existence of all those orders traders have placed around them means that these levels have a magnetic pull on the price.

We want to use that to our advantage.

So, as a price moves close to the pivot point, we can place a trade on the assumption that the price will move towards and hit that level.

This technique will only work for short-term, scalping-type strategies, because we’ve got to be close enough to feel the pull of that ‘magnet’. Exactly how close will depend on the volatility of that market, but I’m talking about a handful of pips.

Here’s a 5 minute chart on GBPUSD. I’ve added a grey band 7 pips either side of the central pivot level and the R1 level to show more clearly how the price interacts with these levels …

What we can see here are multiple opportunities to sell or buy GBPUSD as it comes close the pivot levels, with the actual level itself as the profit target.

How many times can we play this trick off each level?

Well, as you can see on the chart above, the price can interact with the pivot points again and again, but bear in mind that each time it consolidates on the level, more orders are being taken out. I’d recommend that we don’t get greedy – if you can get the signals shown below from one chart in a day, that should do very nicely …

(It’s worth noting on the GBPUSD chart above, that exactly the same kind of consolidation is happening around the 1.2950 round number as well.)

How to make this scalping strategy work

Our knowledge that pivot points work as magnets to the price is what is giving us the ‘edge’ here – that means we’ve tipped the odds in our favour.

But, as with any trading trick, it’s important to remember that the markets just won’t play along with our plans for much of the time.

So, to make a trading trick like this into a profitable strategy, we have to work on our risk-reward profile.

Where will we cut our losses?

There are plenty of instances when the market will fail to touch a pivot point, or will just charge away from it – so we want to ensure we’re going to make enough on our winners to compensate for those losers. This means cutting losses quickly – if the magnet isn’t pulling, we don’t want to run up losses.

We also have to consider the spread cost. As I mentioned in my past post [LINK], this can be a big chunk of the move in a scalping trade, so avoid the scalps that are very small, and stick with markets that have very tight spreads.

Here’s another example. In this case looking for 6 pip moves, with the stop level set 6 pips away.

What you can see here is how just a tiny difference in the profit target and stop distance can make all the difference in profitability. Plus, just a fraction of a pip in extra spread cost can impact the result.

So, how do we make this trick smarter?

Here are a couple of ways we can refine this …

• linking the profit target/stop distance to the volatility of the instrument and the width of the pivot points. Knowing the Average True Range of the market you’re trading is essential. Luckily, pivot points naturally give us some guide to volatility – if pivot points are too tight, there just isn’t room to catch these moves at all – the distance we’re scalping shouldn’t be too large a percentage of the gap between pivots.

• Adding an oscillator indicator to exclude trades where momentum suggests that the price will drive away from, rather than towards, a pivot level. (This could allow us to get second, third, fourth slices of the pie when prices are really ‘stuck’ at a pivot point.)

This scalping strategy is just a starting off place for successfully trading these moves, but looking at these plays on shorter timeframes is an incredible training ground for making fast decisions and reading the markets.

I look forward to hearing how you get on.

 

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