How to use Pivot Points to Trade Breakouts

One tool that provides forex traders with potential support and resistance levels and helps to minimize risk is the pivot point and its derivatives. Similar to your normal support and resistance levels, pivot point levels wont hold forever.

Although Using pivot points for range trading works , but not all the time. In the previous times, where these levels failed to hold, it is advisable to have some tools ready in your forex toolbox to make use of the condition.

Like the what we have highlighted already, there are two main ways to trade breakouts: the aggressive way or the safe way.

Each method will work just fine. Just always note that if you take the safe way, which means waiting for a retest of support or resistance, you may miss out on the initial move.

Using Pivot Points to Trade Potential Breakouts

Lets consider a look at a chart to see potential breakout trades using pivot points. Below is a 15-minute chart of EUR/USD.

Here as seen above that EUR/USD made a strong rally throughout the day. We also observed that EUR/USD opened by gapping up above the pivot point. Price made a strong move up, before pausing slightly at R1.

Gradually, resistance broke and the pair jumped up by 50 pips. Assuming you had taken the aggressive method, you would have caught the initial move and been celebrating as if you just won the World Cup.

Otherwise, if you had taken the safe way and waited for a retest, you would have been one sad little trader. The price did not retest after breaking R1. In short, the same thing happened for both R1 and R2. Also Notice how EUR/USD bulls tried to make a run for R3 as well.

Nevertheless, if you had taken the aggressive method, you would have gotten caught up in a fakeout as the price failed to sustain the initial break. If your stop was too tight, then you would have gotten stopped out. Later on though, youll observe that the price eventually broke through. Remember how there was also a retest of the broken resistance line.

And still, observe how when the pair retraced later in the day and broke down past R3. There was an opportunity to take a short on the retest of resistance-turned-support-turned resistance (read that again if you have to!).

“Role Reversal”

Recall that, when support levels break, they usually turn into resistance levels. This notion of “role reversal” also applies to broken resistance levels which become support levels. These would have been good opportunities to take the “I think Ill play it safe” method.

Where do you place stops and pick targets with breakouts？

What is also considered when taking breakout trades is picking a spot to place your stop. Dissimilar to range trading where you are looking for breaks of pivot point support and resistance levels, you are looking for strong fast moves.

The moment a level breaks, in theory, that level will likely become “support-turned-resistance” or “resistance-turned-support.” Again, this is called a role reversal…since the roles have been reversed. If you were going long and the price broke R1, you could place your stop just below R1.

Lets go back to that EUR/USD chart to see where you could place your stops.

Regarding the targets setting, you would clearly aim for the next pivot point support or resistance level as your take profit point. And Its very common that price will break past all the pivot point levels unless a big economic event or surprise news comes out.

Lets go back to that EUR/USD chart to see where you would put those stops and take profit.

Here In this example, the moment you saw price break R1, then you would have set your stop just below R1. But when you strongly believed that the price would continue to rise, you could keep your position and shift your stop manually to see if the move would continue. Youd have to observe carefully and adjust accordingly. As we proceed to the next lessons, you will get to learn more about this.

As regarding any method or indicator, you have to be aware of the risks of taking breakout trades. First of all, you have no clue of whether or not the move will continue. You might enter thinking that the price will continue to rise, but instead, you catch a top or bottom, which means that youve been faked out instead.

Secondly, As the reports arise, you won‘t be sure if it’s a true breakout or just wild moves caused by the release of important news. Spikes in volatility are a common occurrence during news events, so ensure to keep up with breaking news and be aware of whats on the economic calendar for the day or week.

Finally, as recommended it will would be best to show on other key support and resistance levels just like in range trading. You might be thinking that R1 is breaking, but you failed to notice a strong resistance level just past R1.

The Price may break past R1, test the resistance and just fall back down. Ensure to make use of your forex knowledge of support and resistance, candlestick patterns, and momentum indicators to help you give stronger signals as to whether the break is for real or not.