How to Trade Divergence Using Pivot Point in Forex

A day trader can use daily data to calculate the pivot points each day, a swing trader can use weekly data to calculate the pivot points for each week and a position trader can use monthly data to calculate the pivot points at the beginning of each month. Investors can even use yearly data to approximate significant levels for the coming year. The trading philosophy remains the same regardless of the time frame.
 That is, the calculated pivot points give the trader an idea of where support and resistance is for the coming period, but the trader - because nothing in trading is more important than preparedness - must always be prepared to act. 

The rules for the setup are simple: 

For shorts ( Selling): 

1. Identify bearish divergence at the pivot point, either R1, R2 or R3 (most commonly at R1). 

2. When price declines back below the reference point (it could be the pivot point R1, R2, R3), initiate a short position with a stop at the recent swing high. 

3. Place a limit (take profit) order at the next level. If you sold at R2, your first target would be R1. In this case, former resistance becomes support and vice versa. 

1. Identify bullish divergence at the pivot point, either S1, S2 or S3 (most common at S1). 

2. When price rallies back above the reference point (it could be the pivot point, S1, S2, S3), initiate a long position with a stop at the recent swing low. 

3. Place a limit (take profit) order at the next level (if you bought at S2, your first target would be S1 … former support becomes resistance and vice versa). 

Using the Information The pivot point and its derivatives are potential support and resistance. The examples below show a setup using pivot point in conjunction with the popular RSI oscillator.

RSI Divergence at Pivot Resistance/Support 

Figure 1

This is typically a high reward-to-risk trade. The risk is well-defined due to the recent high (or low for a buy).The pivot points in the above examples are calculated using weekly data. The above example shows that from August 16 to 17, R1 held as solid resistance (first circle) at 1.2854 and the RSI divergence suggested that the upside was limited. This suggests that there is an opportunity to go short on a break below R1 with a stop at the recent high and a limit at the pivot point, which is now a support:

• Sell Short at 1.2853.
• Stop at the recent high at 1.2885.
• Limit at the pivot point at 1.2784.

This first trade netted a 69 pip profit with 32 pips of risk. The reward to risk ratio was 2.16.

The next week produced nearly the exact same setup. The week began with a rally to and just above R1 at 1.2908, which was also accompanied by bearish divergence. The short signal is generated on the decline back below R1 at which point we can sell short with a stop at the recent high and a limit at the pivot point (which is now support):

• Sell short at 1.2907.
• Stop at the recent high at 1.2939.
• Limit at the pivot point at 1.2802.

This trade netted a 105 pip profit with just 32 pips of risk. The reward to risk ratio was 3.28.

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