The most basic technique to use pivot point levels in forex trading is to treat them as regular support and resistance levels. The price will test the levels frequently, just like plain old support and resistance. The more times a currency pair touches and then reverses a pivot level, the stronger the level.
In reality, “pivoting” just means reaching a level of support or resistance and then reversing. If you notice that a pivot level is holding, you may have some decent trading possibilities.
- If the price is approaching the upper resistance level, you could SELL the pair with a stop just above it.
If the price is approaching a support level, you might BUY and place your stop immediately below it.
Let’s take a look at an example so you can visualize this. Here’s a 15-minute chart of GBP/USD.
The price is currently testing the S1 support level, as shown in the chart above. If you believe it will hold, you can purchase at the market and then place a stop-loss order above the next support level.
If you want to be conservative, place a wide stop directly below S2. If the price falls below S2, it is unlikely to rise again, as both S1 and S2 could become resistance levels.
Set your stop just below S1 if you’re feeling more aggressive and confident that support at S1 will hold.
As for your take-profit points, you might aim for PP or R1, which could also act as resistance. Let’s see what would happen if you purchased at the market.
It appears that S1 was used as support! Furthermore, if you had chosen PP as your take profit point, you would have reached your PT!
Of course, it’s not always that easy. You should not solely rely on pivot point levels. Take note of whether the pivot point levels correspond to previous support and resistance levels. You can also use candlestick analysis and other sorts of indicators to provide additional confirmation.
For example, if a doji has formed above S1 or the stochastic is suggesting oversold circumstances, the chances are that S1 will hold as support.
Furthermore, most trading occurs between the initial support and resistance levels. Occasionally, the price will test the second and third levels, and every now and then, the fourth level will be tried. Finally, you should fully comprehend that sometimes the price will simply break through all levels, much like Rafael Nadal does on clay courts.
What will you do if this occurs?
Continue to be a sucker and cling onto your trade while your account dwindles? Will you take advantage and get some pips back? In the following lesson, we’ll show you how to take advantage of when these levels fail.
Next Lesson: How to Use Pivot Points to Trade Breakouts