In general, pivot means turning or rotating like a hinge. In forex trading, it means that a currency pair reverses right after reaching a support and resistance level. A holding pivot point may also mean great trading opportunities. We can use pivot points just like how we use support and resistance levels since the price will also test the levels several times. If the number of times the currency pair touches a pivot point before reversing is more, then the level is more potent.
How do we use pivot points in range trading?
Let us assume that there are two situations. In the first one, the price is getting close to the upper resistance level. Here is what you do: sell the pair and make a stop order on top of the resistance. On the other hand, if the price is getting close to the support level, here is what you can do: place a buy order and a stop order under the level. Here is what we meant a while ago when we said that we could use pivot points just like how we use support and resistance levels.
Let us cite an example.
For instance, you have a 15- minute EUR/ USD chart where the price tests the S1 support level. A while ago, we said you could make a buy order at the market and a stop-loss order over the next support level. However, if you are not this type of trader, you have two more options:
- Conservative traders can set place wide stops below the S2. The price would not go up again if it went past S2 because S1 and S2 may become resistance levels.
- Aggressive traders who believe that the S1 support can hold can place stop orders under the S1.
You can aim for PP or R1 for the take profit points. We can also consider this as something like resistance. If you made a buy order at the market, the S1 might hold as support, and you may just have hit the PT if your target is PP. Just remember that pivot points are not everything because they can be more complex than this simple example. Consider the fact that pivot point levels can line up with the past support and resistance levels.
In another perspective
Did you know? You can mix and match pivot points with other indicators! For instance, you can also use candlesticks or other indicators that you can find helpful for your trade if you want further confirmation. A stochastic oscillator can signal oversold market conditions. A Doji can appear right above the S1. It means that S1 is not likely to hold. Usually, trading happens in between the first resistance and support levels.
The choice is yours.
There are times when the price tests the second levels and the third levels. There can also be instances where the price breaks through every level. If that is the case, you can always accept defeat and hold on to your trade or try to earn back your losses.