In the previous article, we laid the groundwork on the awesome oscillator. Read the article in full before moving on to the strategy.
In this trading strategy, we make use of the oscillator alongside the pivot points to formulate a trading strategy. What’s important to note here is that the pivot levels we use are of a higher time frame.
Thus, we make use of the weekly pivots, while trading the signals based off the 60-minute chart. You can also use other combinations such as using the daily pivots and trading off the 15-minute chart. The trading strategy is not set in stone, and you are free to experiment with different parameters and time frames.
Before we go into the details of the strategy, we will quickly summarize the pivot points which is the main basis for the target for the trading system.
What are pivot points?
Pivot points are price levels that are plotted on the chart. Pivot points can be intraday day or weekly, or even monthly. These price points mark the support and resistance levels.
There are many ways to calculate the pivot points. The most standard is the traditional calculation. But you can also calculate pivot points using other means such as Fibonacci, Woodie’s method, Demark’s way and so on.
To keep it simple, in this trading strategy we will use the traditional or the classic pivot points.
You can calculate pivot points based on the open, high and low price from the previous session (a session could be a day, week or month). Based on the calculation, the current day’s pivot point results.
From this pivot point, we can then plot three levels of support and resistance. Some pivot point indicators can also plot five levels. There is no limit. However, price action often tends to interact the most within the three levels.
Unless volatility rises unexpectedly, it is not that often when you find price interacting with a support or a resistance level five.
The main reference is, of course, getting the current day’s pivot point. This calculated by the average price from the previous day. The average price comprises of the last day’s high, low and close.
Once the main pivot point is drawn, you can then start to get the support and resistance levels.
The first support level is based on multiplying the current day’s pivot by two and subtracting it from the previous day’s high.
Likewise, the first resistance level is based on multiplying the currency day’s pivot by two and subtracting it from the previous day’s low.
The calculation for the second levels of support and resistance is a bit different.
For the second level of support, you just subtract the day’s pivot from the difference between the support and resistance level 1. To get the second level of resistance, you take the difference between the first support and resistance levels and add it to the day’s pivot price.
Finally, the third level of support is calculated by multiplying the difference between the previous day’s high and the pivot and then subtracting this value of the prior day’s low.
The third level of resistance is based on multiplying the pivot and the previous day’s low by two and adding it to the last day’s high.
You can, of course, make use of the many indicators which will automatically calculate the values for you. However, it is also in your best interests to understand how to calculate the pivot levels.
Trading strategy set up
The next step is in setting up your chart. We look to the 60-minute chart and add the daily pivot points of up to three levels.
The chart below shows your set up should look like.
How to trade?
In a previous article, the different buy sell signals were outlined. We simply apply those rules to our chart. But there are some differences as described below.
The twin peaks signals
In this trading strategy, we only make use of the Awesome oscillator’s twin peaks signal. The pivot points are the reference price levels for you to set your target.
You can use the weekly pivot or any of the immediate support and resistance levels as your point of reference setting the targets.
The reason why we only use the twin peaks signals is that these are more versatile and not that commonly occur. Furthermore, the twin peaks signal the rising and falling momentum in price. Therefore, this set of signals makes for an ideal way to trade with the AO and the pivot points.
Let’s illustrate some further examples on the twin peaks signals.
In the above set up, you can see a twin peaks sell set up that forms right after price crosses the first resistance level. Following the initial spike, the price then loses momentum. Following this, you can see how price moves again slightly with the Awesome oscillator showing a lower high.
This becomes the target of your set up, and you take a short position. The stops are placed at or a few pips above the peak.
The next example shows a buy set up of the twin peaks.
In the above chart, you can see how price trades flat within the pivot point and the first support level. The AO signals a twin peak set up. Notice that the twin peaks are a bit further away from each other.
Still, once the set up is formed, a long position can be initiated with the weekly pivot level being the target.
In the case of the buy set up, you can see that the risk/reward is almost close to two. You can use the risk/reward set up to only trade signals that offer you a better risk/reward ratio.
Some more examples follow in the next chart below.
Awesome oscillator and pivot points strategy – Conclusion
This trading strategy is useful to pick out trade entries with relative ease. There are also other methods you can use to improve the odds of this trading system. For example, combining the twin peaks signals with candlestick patterns such as bearish/bullish engulfing can help to enhance the probability of success.
Overall, the Awesome oscillator and the pivot point method is a clean yet straightforward way to trade the markets. This trading system does not make use of any further technical indicators and also keeps your charts clean.
Combining other aspects such as fundamental analysis and gauging the trend in the markets from the higher time frames can enable you to tweak this strategy better.