Take a Look at This Price Action Trading Strategy
Take a Look at This Price Action Trading Strategy
Using K’s Pivot Points and the RSI to Trade the Markets
A trading strategy is composed of a directional component, a filter, and a risk management system. As simple as it may seem, developing a good trading strategy is extremely hard.
This article presents a new trading strategy that uses price action, an indicator, and a risk management system based on volatility.
A Refresher on K’s Pivot Points
K’s Pivot Points try to enhance the classic pivot points by incorporating multiple elements and by applying a re-integration strategy to validate two events:
Found_Support: This event represents a basing market that is bound to recover or at least shape a bounce.
Found_Resistance: This event represents a toppish market that is bound to consolidate or at least shape a pause.
K’s Pivot Points are calculated following these steps:
Calculate the highest of highs for the previous 24 periods (preferably hours).
Calculate the lowest of lows for the previous 24 periods (preferably hours).
Calculate a 24-period (preferably hours) moving average of the close price.
Calculate K’s Pivot Point as the average between the three previous step.
To find the support, use this formula: Support = (Lowest K’s pivot point of the last 12 periods * 2) -Step 1.
To find the resistance, use this formula: Resistance = (Highest K’s pivot point of the last 12 periods * 2) — Step 2.
The re-integration strategy to find support and resistance areas is as follows:
A support has been found if the market breaks the support and shapes a close above it afterwards.
A resistance has been found if the market surpasses the resistance and shapes a close below it afterwards.
The lookback period (whether 24 and 12) can be modified but the default versions work well.
The following chart shows an example of K’s Pivot Points:
The green line refers to the dynamic support and the red line refers to the dynamic resistance. Green arrows show where a buy signal is detected and red arrows show where a sell signal is detected.
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Developing a Discretionary Trading Strategy on K’s Pivot Points
A trading strategy is composed of a directional component, a filter, and a risk management system. As simple as it may seem, developing a good trading strategy is extremely hard. However, starting through a good basis is the right thing to do. The strategy has the following elements:
The directional component: This is the basic way of using K’s pivot points.
The filter: Whenever a bullish signal is received from the directional component, the 13-period RSI must be close or lower than 30. Whenever a bearish signal is received from the directional component, the 13-period RSI must be close or higher than 70.
The risk management system: The average true range (ATR) is used to set stops and targets. You can use multiples of this volatility indicator to choose your risk-reward ratio in a very smart way. Let’s use 4.5x ATR for targets and 2.25x ATR for stops, thus ensuring a good ratio.
The next Figure shows a bullish trade. The blue line is the target and the red line is the stop. With trading, what matters is hitting the target before the stop.
The next Figure shows a bearish trade.
The strategy is quite intuitive and can be tweaked to accomodate the current market conditions regarding volatility.
You can also check out my other newsletter The Weekly Market Sentiment Report that sends weekly directional views every weekend to highlight the important trading opportunities using a mix between sentiment analysis (COT report, put-call ratio, etc.) and rules-based technical analysis.
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