Pivot Point-Cloud Strategy for Binary Options

kumo cloud strategyThis binary options strategy will use pivot points and the Ichimoku Kinko Hyo (the cloud indicator) as the main indicators for the strategy. The pivot points used are the weekly pivot points, which are plotted by a custom indicator known as the Auto Pivot Plotter Weekly V1-00. What this indicator does is to trace three support lines (S1, S2 and S3), a central pivot and three resistance lines (R1, R2 and R3) using the highest, lowest and closing prices over a full week. This makes it different from the regular pivot point calculators which use the daily high, low and closing prices for the calculation.

Time Frame

The charts that are to be used for this strategy are the 4-hour chart and daily chart. This will end up making the expiry times a bit longer than what you may be used to.

The Setup

The Ichimoku indicator can be a complex indicator to work with because it has 5 components:

  1. The Kumo (cloud)
  2. The Tenkan line
  3. The Kijun line
  4. The Chikou span
  5. Senkou spans A and B.

The components of the Ichimoku Kinko Hyo are displayed in this chart below:

kumo cloud strategy

For this setup, we shall concentrate on just the Kumo (cloud) and the pivot points. For the Kumo, we would be looking for the price to breakout above the Kumo (CALL option trade) or below the Kumo (PUT option trade). When the price is contained within the Kumo, this situation is regarded as a status of price being in consolidation or being range-bound. This is of no use to us trade-wise. But we do not just want to look at price breaks of the Kumo in isolation. We want to use the pivot points to help filter the signals so that we can get better accuracy for them.

We trade the following setups when they occur:

  • Price breaking above the Kumo, and being supported by a pivot point immediately below for a CALL trade.
  • Price breaking below the Kumo and being resisted at a pivot point located immediately above it for a PUT trade.

Understanding the resistance pivot points

We have to understand that the resistance pivot points are not strictly for resistance, just as the support pivots are not strictly for support. Once price has broken above any pivot, that pivot ceases to be a resistance and becomes a new support for the price. So you may have a situation when price breaks above the R1 resistance for instance. This converts the R1 to a support level for price which is not yet at/above R2. The same principle works for the support levels, and a broken support will also be converted to a new resistance area. It is important to understand this point as this is critical to the correct interpretation of the strategy.

PUT TRADE

Look at the chart below to get a view of the indicators aligning themselves for a PUT trade. We see the blue line marked as R1, the central pivot (thick orange line) and the red pivot lines marked as S1 and S2.

kumo-put-trade

The Kumo is the part of the Ichimoku indicator which shows brown vertical lines with a brown upper border (up Kumo), and then black vertical lines with black and brown borders (down Kumo). When price breaks below the Kumo, we see at the trade area that the price action candlestick is also being resisted by the solid brown line which represents the central pivot. This is the area to sell.

Notice that the candle which precedes the trade candle is the candle which breaks below the down Kumo. You have to be very careful to identify the Kumo, the central pivot and the price action. Disregard the other components of the Ichimoku. For this trade, the expiry time should be at least 12 to 16 hours, or 3 to 4 candles, since this trade was executed on a 4hour chart.

CALL TRADE

In a Call trade, we are looking for a situation where price breaks above the Kumo and at the same time, bounces off a pivot point. This is the scenario presented in the snapshot shown below.
Here, the price breaks above the Kumo to the left side of the chart, and undergoes a brief pullback to the R1 line which has been broken previously, so it now acts as a support line which resists the attempted pullback. This is the area where the CALL trade is to be initiated.

kumo call trade

In setting the expiry time, it is essential to allow the trade to gain some momentum in the direction of the trade to allow it to end in the money. This is done by checking the time frame of the chart (which is the length of one candle), and allowing the trade to move by some candle lengths before it expires. Since this is a 4 hour chart, it is reasonable to allow three candles or 12 hours to elapse before the trade expires. Again, you must be careful to follow the rules by properly identifying the Kumo, the price break and the position of the pivot points so as to support the trade entry.

Conclusion

It is important to study the chart of the Ichimoku Kinko Hyo which has been presented above to master the various components. This is because only the Kumo is used in this strategy and the trader must be able to separate this component from the other components in the strategy. Thereafter, the strategy must be properly rehearsed on a demo account before traded with real money.

Trades will be more favoured to end profitably when the Kumo is trending and not flat. Also, if price action is in a trend, it is more likely that the trade will end in the money if the correct parameters are used.

Published in Free Strategies

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