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 your 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.
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.
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!
Of course, it ain't always that simple. You shouldn't rely only on the pivot point levels. You should note whether pivot point levels line up with former support and resistance levels.
You can
also incorporate candlestick analysis and other types of indicators to help
give you more confirmation.
For
example, if you see that a doji has formed over S1, or that the stochastic is
indicating oversold conditions, then the odds are higher that S1 will hold as
support.
Also,
most of the time, trading normally takes place between the first support and
resistance levels. Occasionally, price will test the second levels and every
once in a while, the third levels will be tested.
Lastly,
you should also fully understand that sometimes, price will just break through
all the levels like how Roger Federer breezes through the competition in
Wimbledon.
What will
you do when that happens? Continue to hold onto your trade and be a sucker and
watch your account dwindle away? Or will you take advantage and get back some
pips?
In the
next lesson, we'll teach you how to take advantage when these levels break
down.
