Pivot and RSI Divergence Trading System For MT4

Pivot and RSI Divergence  Trading System For MT4

Please note: This strategy was publicly published in the trading community and is free to use. We do NOT make an attempt to decide if this strategy is profitable or not, because we know that the major factors regarding trading results are the skills/experience of the trader who executes the strategy. Therefore, we are mainly explaining the components and rules of the strategy. If applicable, we are highlighting advantages, disadvantages and possible improvements of the strategy.

 

The PPivot and RSI Divergence Trading System For MT4 is a trading method that takes advantage of possible shifts in price action at pivot point levels. Determining these flagging trends is facilitated by the Relative Strength Index indicator (RSI) in identifying price divergence. What takes place is the two technical tools comprising a system that bets on potential reversals at key daily price points.

This article will cover this trading strategy from its strategy components to its strategy rules and proper trade setups.


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Pivot Points

Applying pivot points on the chart is one way to set boundaries for price. And the trader can wager what scenario will play out once the price has approached those boundaries. 

Pivot points display several horizontal support and resistance lines that are based on three price metrics (high, low, and close) of the previous session. These lines can extend up to three layers of support and resistance and can get more significant the deeper the level. 


Traders typically trade pivot points by speculating whether the price will pause at one level or bounce off it. Another way to trade pivot points is to anticipate a close or a failure to close at one of the levels. As it shows, pivot points, to a great extent, are mainly price action.

Still, the effectiveness of pivot points can be further accentuated by other technical tools. Tools like the Moving Average Convergence (MACD) can serve as the trade signal, and pivot points can simply set the target levels and such.

But with this system, what supports the pivot point levels is the RSI.

 

RSI

The RSI is an indicator that tells whether the market has reached a certain overbought or oversold condition. In other words, it identifies if the current price is at a point where it is too extreme now and that a reversal is likely.

RSI is based on the average of an asset's price's "up moves" and "down moves." It displays the bands that represent the overbought and oversold conditions on its graph.

However, determining these extreme conditions is not the only purpose of the RSI. As mentioned earlier, detecting price divergence is also part of the RSI's key uses, which is critical in getting ahead of a probable reversal.

A divergence occurs when an apparent directional disagreement between the price and the RSI indicator exists. This disagreement can be identified using trendlines.


Since the RSI's formula is based on the price's up and down moves, the line on its graph will roughly mimic the price's actual movement. But if there is disharmony, a change in price direction could be on the cards. 

 

Types of Divergence

Essentially, there are two types of divergence: positive and negative. Positive divergence occurs when the price of an asset is moving lower while the RSI is moving higher. On the other hand, negative divergence takes place when the price is moving higher, but the RSI is moving lower.

Positive divergence may indicate that the price could be on course to move higher, while negative divergence may mean that the price could trade lower.

 

Pivot and RSI Divergence Trading System For MT4

Now, the two technical tools form this trading system by detecting a divergence on a pivot point level. All the trader must do is spot a divergence on those levels, then carefully define where the proper entry and exit should be, and act on it.

And to make things simpler, an indicator is available to spot a price divergence as soon as it transpires. This means that the trader can bypass manually tracing the movement of price and the indicator.

The only thing to look for is if the divergence that the indicator was able to identify coincides with a critical pivot point level.

 

BUY TRADE - Pivot and RSI Divergence Trading System For MT4

Here are the rules for a valid long position:

 

    1. The first thing to do is to identify a positive divergence at a pivot point level, which can be at S1, S2, or S3.

    2. After this, the price should make a clear bounce off the support levels, and if it does, a long trade is initiated.

    3. Place a stop-loss at the most recent swing low.

    4. Once in the trade, the initial take profit is the next level higher. For example, if the trade took place at S1, the primary target is the pivot point.

 

Here is a sample valid long setup:


In the 30-minute USDSGD chart above, it is evident that the price is trading lower when contrasted with the line on the RSI graph below. The RSI Divergence indicator already denotes the price divergence by generating a red trendline connecting the RSI's high and low points. A trendline was manually added to the price chart to delineate the dissimilarity in the price and the indicator's direction.

What confirms this as a valid buy trade is that the price divergence materialized exactly on the S1 level of the pivot points. If it were above S1 or between S1 and the daily pivot, no trade would be taken.

The stop-loss for this trade was a few pips below S1, and the initial target is at the daily pivot, which did not take long to reach.

 

SELL TRADE - Pivot and RSI Divergence Trading System For MT4

 Here are the rules for a valid short position:

 

    1. The first thing to do is to identify a negative divergence at a pivot point level, which can be at R1, R2, or R3.

    2. After this, the price should make a clear bounce off the resistance levels, and if it does, a short trade is initiated.

    3. Place a stop-loss at the most recent swing high.

    4. Once in the trade, the initial take profit is the next level lower. For example, if the trade took place at R3, the primary target is R2.

 

Here is a sample valid short setup:


The NZDUSD pair was already trading at the R1 level for some time, but it went against the RSI reading when it made a slight push higher. In turn, the RSI Divergence indicator detected this and connected the downward sloping points of the line on its graph. The red trendline on the chart was added to make the contrast more apparent.

In this trade, the signal to sell happened when the price traded lower via the red candle after the green one that signified the swing high. Stop-loss was placed a few pips above the highest point, and the target was at the daily pivot point level.

 

If you trade on a real money account then we suggest that you use a conservative risk per trade like 0.5% to 2%. However, we recommend that you first trade the system a few weeks on a demo account with paper money.

Download the complete system description and the files here:

FREE Pivot and RSI Divergence Trading System

Download the FREE Pivot and RSI Divergence Trading System for MT4.

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