Lesson #54 Steps to Trade by means of Pivot Points Strategy

How to Determine Breakout Trades

When entering a trade, you have to look first at the pivot point because it will show the primary support or resistance level. Huge price actions happen at the price of the pivot point.

Remember when the price touches the pivot point, you can now determine if you will go long or short and set your stop and profit targets. The rule of thumb is: if the price is above the pivot then it is bullish; it is bearish if it is below the pivot.

For example, if the price is perching around the pivot point and closed below it, then you can decide to go short. Set your stop order above the pivot while your profit taking would be at S1.

If you notice that the price continues to fall below S1, adjust your stop order slightly above S1 instead of cashing-out at S1. The typical bottom of the day’s trade would be at S2. This is your ultimate profit taking point.

In an uptrend situation, the converse should apply. You have to take a long position if the price closes above the PP. Set your stop order below the pivot and the R1 and R2 levels would be your profit taking points.

How to Determine Range-bound Trades

You can determine the strength of support or resistance levels at different pivot points. This is shown by the number of times when the price bounces off the pivot level.

The level will be stronger if the price hits the pivot point several times then reverses. That is why it is called a pivot. The price is reaching support/resistance then makes a reversal.

You should sell a pair if you see that it is reaching an upper resistance level. Set a tighter protective stop though by placing it just above the resistance level.

If the price of the pair continues to go up and breaks through above the resistance level, this is called as the upside breakout. You will be stopped at your short order. If you think that this break out has strong buying follow-through, then take a long position as you re-enter.

You need to position you stop just below the former resistance level that has been breached. This acts as support.

If the price is reaching the lower level support, you can place a buy order and set your stop below the support level.

Does It Seem Hypothetically Perfect?

It would look very simple in theory.

If you are in the real world, the pivot points do not always kick-in. Prices have a tendency to circle around the PP. It is really very difficult to predict what direction it will take.

There are times when the price will totally stop before it touches the pivot then retreats. This means you did not reach you profit taking target.

Sometimes, it may seem that the pivot is providing a strong support level so you take a long position. Surprisingly, the price will slide and you will be stopped. Then the price will reverse its course and go to your direction.

It is important therefore to be selective when you are creating a pivot point strategy. You have to strictly follow this strategy.

Study this chart and find out how difficult or easy pivot points could be.

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Take note of the pretty colors here.

Take a look at the orange oval. You can see that the pivot point provided a strong support but if you took a long position on the PP, it actually never rose to R1.

Take a look now at the first purple circle. The pair made a break down through the pivot point. However, it never touched the S1 and reversed course back to the pivot point.

Take note of the second purple circle which is the second break through where the pair was able to reach the S1 before it turned and went back to the pivot point.

At the pink oval, the pivot point provided strong support but again it never reached the R1.

Look at yellow circle now. It showed how the pair broke through the downside, barreled its way through the S1, and actually managing to fall down through the S2.

If you took a long position based on this chart, your stop order will always kick in for each scenario.

In the first place, buying this pair is really not a good idea. That’s because this pair is already trending down which was not shown on the chart.

Always remember the dictum: Trend is Your Friend. The next lesson will tackle trends. It will teach you to use multiple timeframes so you can correctly see the direction of the trend. That lesson will teach you not to commit mistakes such as the one above.