Monday, August 08, 2011

Range Trading with Pivot Points

The simplest way to use pivot point levels is to use them just like your regular support and resistance levels. Just like good ole support and resistance, price will test the levels repeatedly.

The more times a currency pair touches a pivot level then reverses, the stronger the level is. Actually, "pivoting" simply means reaching a support or resistance level and then reversing.

If you see that a pivot level is holding, this could give you some good trading opportunities.

If price is nearing the upper resistance level, you could sell the pair and place a stop just above the resistance.

If price was nearing a support level, you would buy and put your stop just below the level.

See? Just like you're regular support and resistance! Nothing hard about that!
Let's take a look at an example so you can visualize this. Here's a 15-minute chart of GBP/USD.

Using pivot points with ranges

In the chart above, you see that price is testing the S1 support level. If you think it will hold, what you can do is buy at market and then put a stop loss order past the next support level.

If you're conservative, you can set a wide stop just below S2. If price reaches past S2, chances are it won't be coming back up, as both S1 and S2 could become resistance levels.

If you're a little more aggressive and confident that support at S1 would hold, you can set your stop just below S1.

As for your take profit points, you could target PP or R1, which could also provide some sort of resistance. Let's see what happened if you bought at market.

Support held and PT hit

And bam! Looks like S1 held as support! What's more, if you had targeted PP as your take profit point, you would have hit your PT! Woohoo! Ice cream and pizza for you!

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