[B]The PivoFibo trading system[/B]
This trading system was developed based on two elements of technical analysis: Fibonacci retracement and Pivot Points; hence the quirky name PivoFibo. When trading with the momentum – going long in an up-trend and going short in a down-trend, these elements when combined generate very powerful trade signals. You will see how.
[B]Concept Refresher[/B]
[B]Fibonacci retracement[/B] – The most important thing to note is that the Fibonacci concepts work best when the market is displaying clear trends, i.e. making smooth high and lows. In an up-trend, you would draw the retracement from the highest low to the highest high. Similarly, in a down-trend, the retracement would be drawn from the lowest high to the lowest low. When there is a clear trend, the market will pull back or retrace a certain percentage before continuing the trend. These pullbacks occur frequently at the following Fibonacci retracement levels 38.2%, 50%, 61.8% and 78.6%. For the purposes of this trading system, we will concentrate only on the 61.8% and 78.6% levels. No trade shall ever be placed on any other Fibonacci level (e.g. 50%) since the risk is simply too high. The idea here is to minimize the probability of losing a trade! Again, trades shall be placed at no other level but the 61.8% and 78.6% retracements.
[B]Pivot Points[/B] – We will use pivot points to identify support and resistance levels. Pivot points are very similar to the Fibonacci levels in that they are objective markers being watched by most traders and are almost self-fulfilling. Now you may be getting a sense of the power of the signals generated by the trading system – combing Fibonacci and pivot points. For the purposes of this trading strategy, we will use weekly and monthly pivots. The weekly pivot point (weekly PP) will have its own set of resistance levels (weekly R1, weekly R2) and support levels (weekly S1, weekly S2). Similarly, the monthly pivot point (monthly PP) will have resistance levels (monthly R1, monthly R2) and support levels (monthly S1, monthly S2). The key thing to know here is that market will always test these levels and at times breakthrough these levels. Treat these pivots as powerful support and resistance levels.
[B]The Power of Two: Pivo + Fibo[/B]
If you understand the concepts behind Fibonacci levels and pivot points, the functioning of this system will be easy for you to understand. You may use this trading technique as is, or modify it to suit your trading style – the end result will be a stellar FX trading system!
For this system to work, the market will have to have a clear direction – up-trend or down-trend. You will also need weekly and monthly PP, S1, S2, R1, R2 levels on your chart. This can be calculated manually or you can use the freely available pivot point indicator. Ensure that your Fibonacci retracement tool displays the 61.8% (0.618) and 78.6% (0.786) levels. This strategy works best on 1hour and 4 hour charts.
First, identify the trend of the market. Is it an up-trend or a down-trend? We will go long in an up-trend and short in a down-trend; i.e. trade with the momentum.
For an up-trend, draw your Fibonacci levels from the previous low (highest low) to the highest high. Wait for the retracement to occur at the 61.8 or 78.6 Fibonacci level. If the Fibonacci retracement level coincides with any one of the pivot point levels (monthly S1, S2, R1, R2 or weekly S1, S2, R1, R2) the trade is on. You would enter the trade when the market makes a clear low at Fibonacci and monthly support or resistance levels. A low can be defined by the formation of two bullish candlesticks to the right and left of a low candlestick on the 15 minute chart.
The stop loss will be placed at the previous low. Since we are trading at the 61.8 and 78.6 Fibonacci levels only, the loss is minimized.
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