Forex Trading Strategy about Pivot and Hammer
We will study a forex trading strategy to based on price action and behavior at specific levels on the chart.
We will use a candlestick formation well known as Hammer and we will apply Pivot levels as special types of price support and resistance.
Also we apply on the chart EMA(20) – Exponential Moving Average and EMA(50) - Exponential Moving Average.
This forex trading strategy can be used for all currency pairs on 15 minutes and 4 hour timeframe.
Before we examine all the details who concern this particular forex trading strategy we must describe what we mean ‘Hammer’ and ‘Pivot levels’.
In order to define a Hammer as perfect pattern :
The lower shadow is at least twice as large as the body and the upper shadow.
It is located at major support.
An inverted Hammer can define as perfect pattern :
The upper shadow is at least twice as large as the body and the lower shadow.
It is located at major resistance.
Pivot levels are specific areas on the chart where price act as magnet. In order to calculate daily pivot levels we need High, Low, Close Price of the previous day.
Below is the formula for calculating pivot levels :
Central Pivot Point (P) = (High + Low + Close)/3
Resistance Level 1 (R1) = 2xP – Low
Resistance Level 2 (R2) = P + (R1 - S1)
Resistance Level 3 (R3) = High + 2x(P - Low)
Support Level 1 (S1) = 2xP - High
Support Level 2 (S2) = P - (R1 - S1)
Support Level 3 (S3) = Low – 2x(High - P)
In order to calculate weekly levels we have to apply the same formula but using High, Low and Close Price of the previous week instead of the previous day.
Trading Rules
We use daily pivot levels at 15 minute timeframe.
And at 4 hour timeframe we will use weekly pivot levels.
Buy Rules
- Price must be above EMA(20).
- EMA(20) must be above EMA(50).
- The price crosses a pivot level and turns back to that level.
- A Hammer formed.
When the hammer candlestick closed, we enter at forex market with three lots. Stop loss should be placed 10-20 pips below the low of the Hammer depending on the volatility of the currency pairs we’re trading.
Take Profit
We close first lot after equal number of pips of stop loss (risk / reward 1:1).
For the remaining two lots we use trailing stop a few pips below EMA(20).
Sell Rules
- Price must be below EMA(20).
- EMA(20) must be below EMA(50).
- The price crosses a pivot level and turns back to that level.
- A Hammer formed.
When the Hammer candlestick closed, we enter at forex market with three lots. Stop loss should be placed 10-20 pips above the high of the Hammer depending on the volatility of the currency pairs we’re trading.
Take Profit
We close first lot after equal number of pips of stop loss (risk / reward 1:1).
For the remaining two lots we use trailing stop a few pips above EMA(20).
Important Reminder
At 15 minute timeframe we use daily pivot points.
At 4 hour timeframe we use weekly pivot point.
Important : All investors should know that any forex trading strategy before implementing in a real account needs to be tested in a demo account in order to be fully understood.
Also, all traders should be aware that extraordinary events occurring in the forex market very often, and is likely to alter the financial results of a forex trading strategy.
