Our guide breaks down how to master the Pivot Point Reversal Strategy in crypto to profit from market swings and to make smarter trades.

Mastering the Pivot Point Reversal Strategy in Crypto Trading

With a break even failure rate of 43% and meeting price target of 80%, pivot point reversal strategy is specifically tailored for cryptocurrency trading to profit from market swings and improve trading outcomes.

Although the potential for high profits in the cryptocurrency market is undeniable, the risk of significant losses is also present.

Do you care to understand the Pivot Point Reversal Strategy in crypto trading? This guide explains the concept of pivot points, how to calculate them and how they can be used to identify potential reversals in price trends.

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Key Takeaways

• The Pivot Point Reversal Strategy in Crypto Trading helps spot potential price trend reversals in the crypto market by analyzing pivot points and support/resistance levels.

• The concepts are accessible, easy to understand and adaptable to various market conditions, whether trending or ranging.

• You can generate clear signals for entering and exiting trades based on potential reversals by combining pivot points with confirmation from other indicators.

What is Pivot Point Reversal Strategy in Crypto?

Alt text: Source – Chart showing support and resistance levels calculated through pivot points can be used for reversal trades as well.

The Pivot Point Reversal Strategy in cryptocurrency is a trading strategy which leverages the support and resistance levels derived from pivot points to identify potential reversals in price trends within the cryptocurrency market. 

This strategy thrives on the idea that prices often find support or resistance at these predetermined levels, leading to a potential reversal if the price encounters them.

Pivot points are a technical analysis tool used across various markets, including cryptocurrencies. They act as a central reference point, calculated based on previous price movements to identify potential support and resistance levels where price trends might reverse.

While pivot points have become a staple in technical analysis, their origins might surprise you. Contrary to their financial application, the concept actually stems from ancient sundials! The markings on a sundial that cast shadows to indicate time served as a central point (pivot) around which the shadow rotated. This foundational idea of a central reference point eventually evolved and found its way into the world of finance.

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How Pivot Point Reversal Strategy Identifies Potential Reversals

There are two primary ways in which the pivot point reversal strategy identifies potential reversals in cryptocurrency market:

Breakout of Support/Resistance

Trading Strategies for Breakouts Above Pivot Point: A breakout above the pivot point, particularly with increased volume, can signal a potential bullish reversal. You might look to enter long positions (buying) anticipating further price increase.

Alt text: Chart illustration of trading strategy for breakouts above Pivot Point
Trading Strategies for Breakouts Below Pivot Point: A breakout below a support level, especially with strong bearish volume, can indicate a potential bearish reversal. You might enter short positions (selling borrowed crypto) expecting the price to continue dropping.

Alt text: Chart illustration of trading strategy below the pivot point breakout

Price Behavior at Pivot Point

• Reversal Signals Based on Price Action at Pivot Point: Price action around the pivot point itself can also provide clues. If the price approaches the pivot point but struggles to break through, it might signal a potential reversal in the opposite direction. For example, a price consistently rejected at the pivot point after an uptrend might suggest a bearish reversal.

• Fakeout Patterns and How to Avoid Them: It is important to be aware of “fakeout” patterns, where the price briefly breaches a support/resistance level before reversing back. Confirmation from other technical indicators can help distinguish legitimate breakouts from fakeouts.

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Components of a Pivot Point

Alt text: Source – Illustration showing that if the price is above the pivot point, the market sentiment is bullish and If the price is below the pivot point, the market sentiment is bearish.

The components of a pivot point are crucial before applying the Pivot Point Reversal Strategy in crypto. Here’s a breakdown of the key components:

Pivot Point Calculation

The core of a pivot point lies in its calculation. The standard formula used for daily pivot points is:

Pivot Point (PP) = (High + Low + Close) / 3

Where:

• High = Highest price of the previous trading day
• Low = Lowest price of the previous trading day
• Close = Closing price of the previous trading day

This formula essentially takes the average of these three significant price points from the prior day.

However, keep in mind that variations exist for calculating pivot points for different timeframes, such as hourly or weekly charts. These variations often incorporate additional price points to account for the shorter or longer time frames involved.

Support and Resistance Levels

Once you have the pivot point (PP), the magic happens. The formula generates additional support and resistance levels based on the PP, acting as potential zones where price trends might reverse. 

The number of these levels can vary depending on the pivot point calculation method used. Commonly used methods include Camarilla pivot points and standard pivot points, each generating a different number of support/resistance levels.

Here’s a general breakdown of how to interpret the strength of each level:

• Pivot Point (PP): Considered a central reference point, a breakout above the PP suggests bullish sentiment, while a break below indicates bearish pressure.
• Support Levels (S1, S2, etc.): These levels, typically positioned below the PP, represent areas where the price might find support and bounce back upwards. The closer the level is to the PP, the stronger the potential support.
• Resistance Levels (R1, R2, etc.): Resistance levels (above the PP) represent areas where the price might encounter resistance and potentially reverse downwards. Similar to support levels, the closer the level is to the PP, the stronger the potential resistance.

The crypto market can move faster than a rocket, so mastering a strategy like the Pivot Point Reversal Strategy can equip you to react quickly to potential reversals and potentially avoid missing out on those sweet gains.

Types of Pivot Points

There are various pivot point calculation methods, each with its own advantages. Here are three common types:

Standard Pivot Points

Alt text: Chart of Standard Pivot Points

These are the most basic pivot points, calculated using the formula we discussed earlier:

Pivot Point (PP) = (High + Low + Close) / 3

Standard pivot points typically generate three support levels (S1, S2, S3) and three resistance levels (R1, R2, R3) relative to the central pivot point.

Fibonacci Pivot Points

Alt text: Chart of Fibonacci Pivot Points

This method incorporates the Fibonacci retracement levels, a popular technical analysis tool based on historical price patterns. 

The calculation gets more intricate but leverages the standard pivot point (PP) and multiplies it by various Fibonacci ratios (like 38.2%, 61.8%, and 100%) to generate additional support and resistance levels.

Benefits of Using Fibonacci Pivot Points with Reversal Strategy:

• Increased Precision: Fibonacci levels often align with natural support and resistance zones, potentially offering a more refined view of reversal areas compared to standard pivot points.
• Confirmation with Other Fibonacci Tools: If you are already familiar with Fibonacci retracements, you can seamlessly integrate these levels with the Pivot Point Reversal Strategy for stronger confirmation signals.

Camarilla Pivot Points

Alt text: Chart of Camarilla Pivot Points

This method is a more complex variation that uses a wider range of price points from the previous trading day to calculate the pivot point and multiple support/resistance levels.

Benefits of Using Camarilla Pivot Points with Reversal Strategy:

• Additional Reversal Signals: Camarilla pivot points generate more support/resistance levels than standard methods, potentially offering a wider range of potential reversal zones.
• Defined Risk-Reward Ratios: Some variations of Camarilla pivot points come with pre-defined risk-reward ratios based on the distance between pivot and support/resistance levels, aiding in trade management.

Trading Crypto with the Pivot Point Reversal Strategy

Alt text: Source – Pivot Points chart illustrating bullish reversal

Here is the practical application of the pivot point reversal strategy in crypto trading:

Entry and Exit Signals

There are both entry signals on pivot points and conformation indicators and exit signals to secure profits and minimize losses. Here is how they work.

Entry Signals Based on Pivot Points and Confirmation Indicators:

You should look for a confluence of signals. A confirmed breakout above a pivot point with a bullish signal from an indicator like MACD or RSI can be a strong entry signal for a long position. 

On the other hand, a confirmed breakdown below a support level with a bearish signal from an indicator can be a good entry point for a short position.

You should also consider volume. Increased volume alongside a breakout or breakdown strengthens the reversal signal and suggests higher conviction from market participants.

Recommended reading: 8 Leading Indicators for Crypto Predictions

Exit Strategies to Secure Profits and Minimize Losses

Set profit targets based on the distance between the entry price and the nearest support/resistance level, or use a trailing stop-loss that automatically adjusts as the price moves in your favor.

Likewise, you should always place a stop-loss order below your entry price for long positions and above your entry price for short positions to limit potential losses if the reversal doesn’t materialize. Pivot point levels themselves can be used as initial stop-loss placements, but these can be adjusted based on your risk tolerance and volatility.

Risk Management Considerations

Here are some risk management considerations when trading crypto with pivot point reversal strategy:

Position Sizing and Stop-Loss Placement

Position sizing refers to the amount of capital you allocate to each trade. Maintain a consistent and conservative position size relative to your total account balance to avoid risking too much on any single trade.

Stop-loss placement is crucial for managing risk. Ideally, your stop-loss should be placed at a distance that balances potential reward with acceptable risk. Pivot point levels can be a starting point, but consider volatility and confirmation indicators when finalizing stop-loss placement.

Money Management Strategies for the Pivot Point Reversal Strategy

Develop a clear money management plan that dictates your position sizing, risk tolerance and profit targets. 

This plan should be tailored to your individual risk appetite and trading goals. Maintain discipline and avoid emotional trading decisions. Stick to your pre-defined plan and exit positions when your stop-loss is triggered or your profit target is reached.

Recommended reading: 5 Best Crypto Market Trend Indicators

Backtesting the Pivot Point Reversal Strategy

Before deploying the Pivot Point Reversal Strategy with real capital, backtest it using historical data. Backtesting allows you to evaluate the strategy’s performance on past price movements and identify potential strengths and weaknesses.

Many charting platforms and online tools offer backtesting functionalities. These tools allow you to apply the strategy to historical data and analyze its performance metrics.

Combining Pivot Points Reversal Strategy with Other Indicators

Alt text: Source – Pivot Points illustration showing that bearish breakout occurs when the price action drops below the pivot level.

The effectiveness of pivot points can be amplified by incorporating other technical indicators. Here are some popular indicators which can complement the Pivot Point Reversal Strategy:

RSI to Confirm Reversal Signals

The Relative Strength Index (RSI) is a momentum oscillator that indicates overbought or oversold conditions. When a pivot point coincides with an RSI reading at the extremes (above 70 for overbought, below 30 for oversold), it strengthens the reversal signal from the pivot point. 

For instance, a price nearing a support level with an RSI hovering around 30 suggests a potential bullish reversal, as the asset might be oversold and due for a bounce.

Recommended reading: How to Use Overbought and Oversold Indicators in Crypto Trading

MACD to Identify Trend Strength and Potential Reversals

The Moving Average Convergence Divergence (MACD) helps identify trend direction and potential turning points. 

If a pivot point aligns with a bearish crossover (MACD line crossing below the signal line) on the MACD indicator, it strengthens the bearish reversal signal from the pivot point. A bullish crossover on the MACD coinciding with a pivot point reinforces a potential bullish reversal.

Stochastic Oscillator to Gauge Overbought/Oversold Conditions

Similar to the RSI, the Stochastic Oscillator measures overbought and oversold conditions. 

When a pivot point aligns with extreme readings on the Stochastic Oscillator, it reinforces the reversal signal. A low Stochastic reading near a support level suggests a potential buying opportunity, while a high reading near a resistance level suggests a potential selling opportunity.

Bollinger Bands to Identify Price Compression and Potential Breakouts

Bollinger Bands are volatility bands that constrict during consolidation periods and expand during volatile phases. 

A price approaching a pivot point while confined within tightening Bollinger Bands® might indicate a potential breakout, especially if accompanied by increased volume. 

A breakout above the upper Bollinger Band® near a resistance level could signal a stronger bullish breakout, while a breach below the lower Bollinger Band® near a support level could indicate a stronger bearish breakout.

The average daily price fluctuation for Bitcoin is about 3%, which is significantly higher than traditional stock markets. This establishes the context of volatility in the crypto market, where identifying reversals with a strategy like pivot point is crucial.

Recommended reading: How to Use the Cryptocurrency Rate of Change (ROC) Indicator

Advantages of the Pivot Point Reversal Strategy in Crypto

The Pivot Point Reversal Strategy offers several benefits in cryptocurrency trading. Here are some of them:

Easy to Understand and Implement

The core concept of pivot points and support/resistance levels is relatively straightforward. This makes this strategy accessible whether you are new to trading crypto or experienced.

Imagine that for a Bitcoin (BTC) chart, the central pivot point (P) is calculated, and additional support (S1, S2, S3) and resistance (R1, R2, R3) levels are derived based on the P value. This creates a framework for understanding potential price movements.

This inherent ease of understanding makes the Pivot Point Reversal Strategy accessible for both new and experienced traders. You don’t need years of experience to grasp the core principles and start implementing this strategy in your cryptocurrency trades.

Provides Clear Entry and Exit Signals

The pivot points strategy can generate clear signals for entering and exiting trades based on potential reversals.

For example, if the price of Ethereum (ETH) approaches a support level (S1 on the chart) and starts bouncing off it , it suggests potential buying pressure. This could be a good entry point for a long trade (buying ETH with the expectation that the price will rise).

Adaptable to Different Market Conditions

Pivot points can be applied in various market conditions, whether trending or ranging. By focusing on breakouts or price behavior around the pivot point, you can adapt the strategy to the current market dynamics.

Can Be Used with Other Technical Indicators

The beauty of the Pivot Point Reversal Strategy in crypto lies in its synergy with other technical indicators. Combining pivot points with RSI, MACD, Stochastic Oscillator, or Bollinger Bands® can strengthen reversal signals and provide a more comprehensive view of the market.

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Limitations of the Pivot Point Reversal Strategy in Crypto

While the Pivot Point Reversal Strategy in crypto offers valuable insights, it’s important to acknowledge its limitations:

False Signals Can Occur

The crypto market can be highly volatile and susceptible to sudden price movements. These fluctuations can sometimes trigger false breakouts or reversals that contradict pivot point signals.

Also, If a large number of people rely on pivot points, the trading activity can influence price movements around these levels, potentially creating a self-fulfilling prophecy of support or resistance. However, this doesn’t guarantee future behavior.

Future Performance Not Guaranteed

The cryptocurrency market is constantly evolving, and past performance is not necessarily indicative of future results. Pivot points are based on historical price data, and future price movements may not strictly adhere to these historical support and resistance levels.

Requires Discipline and Risk Management

The strategy can generate false positive signals, leading to losing trades if proper risk management practices are not followed.

Likewise, the fast-paced nature of the crypto market can trigger emotional responses. You should stick to a predefined trading plan and manage risk effectively to avoid impulsive decisions based on emotions.

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Conclusion

The Pivot Point Reversal Strategy in cryptocurrency trading offers a valuable tool to identify potential reversals in price trends. 

When you grasp how to calculate pivot points and interpret the derived support and resistance levels, you can gain valuable insights into potential turning points in the market. However, the limitations of pivot points, such as the possibility of false signals and their reliance on historical data, necessitate a cautious approach. 

You should combine pivot point reversal strategy with other technical indicator strategies and employ sound risk management practices like position sizing and stop-loss orders.