Forex Education

How To Use Pivot Points

Breakout Trading

Breakout trading is exactly what the title suggests. When a candle breaks through a pivot point and closes beyond it that suggests that the price will continue to move in the direction of the break. Let's look at a picture:

The green highlighted circle shows the first time the price broke and above the pivot point.

When a pivot line is broken it can mean that the price will continue to move beyond that point. The way to trade breakouts is by entering in the direction of the break. When you enter your stop loss should be on the opposite side of the line and your take profit should be the next pivot line.

In the picture above the entry was about 2.0555 (green line) the stop would have been below the pivot at 2.0535 (red line). Your take profit would be around the R1 line at 2.0594 (next pivot after entry).

That trade was worth just over 40 pips. But like I always, using just pivot points isn't enough. There is a lot more to this game than waiting for some lines to be broken.

Range Bound Trading

Range bound trading is exactly what is sounds like; it is trading when the price is stuck in-between two pivot points. Take a look at this picture:

The number of times a pair hits a pivot point and reverses reveals to us the strength of that point. If a pivot point is hit 5 times in one day without breaking that tells us that the pivot at that level is very strong. Alternatively if it has only been hit once you might want to wait for at least one more hit and bounce before you take any range bound trades.

If you are looking at your charts and you see that the pair has touched a certain pivot level and reversed at least two times, you could start thinking about some range bound trading. Let's say the pair is reaching a bottom, support pivot point. When it touches the pivot you could take a long trade and place a stop loss just below the pivot point.

Now here is the interesting part. If the price does indeed break through the line and takes out your stop that would constitute a break of a pivot and you could take a trade. So you would lose xx pips when it breaks the line but you might gain it back trading it as a breakout. Like everything else, pivot points should not be used alone. Instead they should be uses as part of a system.