Using Psychological Levels, Pivot Points and Stochastics together can be very powerful in a good trade plan.
This last week the EURUSD provided two trading opportunities that illustrate this methodology. In this article I give two examples of how Psychological Levels, Pivot Points and Stochastics work very well together.
The first example of using these three together was on Monday Oct. the 10th on the EURUSD. Please see the attached purple chart. I have labeled the date and drawn a red line through the chart where stochastics is overbought in the 1 hour view and the EURUSD has rallied to find resistance at the psychological level 1.1200. Stochastics is great at reading overbought conditions however it must be used with caution because in a strongly trending bullish market, for example, stochastics will give an overbought signal, which could lead you to look for a reversal, when the reality is that the market is just going to keep trucking in the same bullish direction. So, this is why having solid resistance that doesn’t break is so important and is where the psychological levels and the pivot points come into play to identify the levels that are not going to break and will stop the momentum of price. These levels provide the needed resistance to stop price and send it in the opposite direction. Please see the white attached chart that has pivots and is labeled 10.10.16, you will see that price hits resistance at DM3 which corresponds with the psychological level 1.1200. This confluence of resistance provides a key reversal level. With price being in an overbought condition on this day, as seen by 1 hour stochastics, there was a very good short opportunity on this day.
If you look at the second white chart labeled 10.14.16 you will see that this same scenario played out almost exactly.
Stochastics was overbought in the 1 hour view, price reversed again off DM3 and there was a mid-point psych level at 1.1050 that provided added resistance at DM3 and price was stopped. Price once again fell and provided a very nice opportunity to go short. I find stochastics very useful to identify overbought and oversold conditions in the Day View, the 4 Hour View and the 1 Hour View. For me the 15 min view gives too many overbought and oversold signals to build a solid trade plan.
The EURUSD is bearish so a retracement to Daily M3 or even R1 is overbought territory. If you notice DM3 is red on the charts attached because it generally will produce a bearish move and red candles represent bearish momentum.
Wait for stochastics to produce clear overbought or oversold signals and then look for support or resistance to come into play and stop the momentum that pushed price to either the overbought or oversold condition. Then you are in a position to get in and ride price in the new direction and can put your stop on the other side of the support or resistance that stopped price and will get a good risk reward ratio for the trade.
Best of luck,