A Simple Guide to Trading With Pivots a Directional Market

By DailyFx | Updated July 31, 2014 AAA

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Talking Points:

-Why Pivots

-Where to Spot Entries

-Setting Stops & Limits

If you’re a new trader, Pivot Points could very well be your best friend as far as identifying levels to develop a bias, place stops, and identify potential profit targets for your trade. Pivot points are not a new tool and have in fact been a go-to for traders that traded in the pits for decades. The simple argument goes as such: Price will often move relative to a prior extreme and, unless an outside force causes the price to do so, price should stop near a relation to prior extremes.

A Simple Guide to Trading With Pivots a Directional Market

If you are brand new to pivots, think on this question. How much more difficult would it have been to learn to drive if there were no street signs or traffic lights? An odd question to be sure, but the comparison to pivots will become quite clear.

A Simple Guide to Trading With Pivots a Directional Market

Pivots provide the same guidance to traders as traffic lights to do drivers. Without them, driving is a mess and sometimes even with them, driving is a mess, but you’d rather have them than go without. Pivots help you to see when to go, yield and stop on your preferred currency pair while providing clear points to manage risk.

If you’re uncomfortable with the concept of Trade Management so that you don’t let one trade sidetrack your trading goals you can register for our FREE online course here.

Where to Spot Entries

Sticking with the traffic light entries, you first need to understand if the market is ranging or not. Pivots also, make this quite simple. If you take a look at past pivots by adjusting the ‘Show Mode’ from Today to Historical, you can look at the direction of Pivots to determine a trend in range by finding out if Pivots themselves are making higher lows or lower highs denoting a trend or are moving sideways representing a range.

Learn Forex: Past Pivots Show a Clear Uptrend

A Simple Guide to Trading With Pivots a Directional Market

Presented by FXCM’s Marketscope Charts

If the market is trending, then you ideally want to look for two points on the chart to enter the trade based on the trend. In an uptrend, you’d like to look for price near the pivot point or the 1st support level. In a downtrend, you’re best looking for price near the pivot or the 1st resistance level. If you believe the market is in a downtrend and the 2nd Resistance level is hit, then you may want to re-think your assessment or if the trend is still in play, a deep correction could be developing.

Learn Forex: Key Pivot Levels (Weekly Example Shown)

A Simple Guide to Trading With Pivots a Directional Market

Presented by FXCM’s Marketscope Charts

You’ll notice above that the market began around the Pivot Point for the first few days of the week before breaking out of its Opening Range. Once the opening range broke, a strong move through the 1st resistance level and into the 2nd developed. The breakout from the pivot and opening range was a helpful development to see that the market could not develop downside momentum so that when the buying pressure presented itself, the market quickly traveled to the R2.

Learn Forex: Opportunity to ‘Buy the Dip’

A Simple Guide to Trading With Pivots a Directional Market

Presented by FXCM’s Marketscope Charts

Pivots points are built around price action and price extremes. In the chart above, you can see that once the higher-low is established, you’re able to use key spots on the chart to identify entries. A weak break below the Pivot that doesn’t touch the 1st support level in an uptrend (1st resistance in a downtrend) or a Pivot touch that is rejected only to return in the direction of the trend are key entries.

Setting Stops & Limits

You have two options for stops and losses based on how aggressive you are. My preference is to set a limit at the 2nd support or resistance level in favor of the trend. Therefore, in an uptrend, I’ll set my limit at the R2 level and at the S2 level in a downtrend. A more conservative trader may prefer to set limits at the respective R2 or S1 in favor of the trend thereby capturing a quick move in favor of the trend or an extended move within a range.

When setting stops, you have a few options as well. Because I favor the swing trade and usually will sit in a trade for a few weeks, my preference is to set a stop below the S1 in an uptrend or the R1 in a downtrend. These levels are often untouched in a strong trend and if you think you’re in a downtrend and the R2 is tagged, then there is a higher probability that the trend is reversing. If you don’t set stops, stops are recommended, a trade goes against you to the 2nd support or resistance level, then it is often worth it to exit the trade because a shift may be underway.

Learn Forex: R2 Touch Precedes Trend Reversal

A Simple Guide to Trading With Pivots a Directional Market

Presented by FXCM’s Marketscope Charts

Suggested Reading: How Pivot Points Help Keep Your Head Straight When Volatility Is High

Understand the Focal Point of Price in Forex through the Pivot Range

Happy Trading!

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