Trading on Pivot Level Breakout

Trading Breakouts with Pivot Levels

 

Pivot levels, like traditional support and resistance levels, are not permanent barriers. If you use them for range trading and rebounds, remember that prices often break through these levels. Successful breakout trading requires approaches that help you capitalize on these situations.

Approaches to Trading Breakouts

 

There are two main approaches to trading breakouts: conservative and aggressive.

•Conservative Approach: This method involves waiting for a retest of the broken level before entering a position. It reduces the risk of a false breakout but might cause you to miss a strong price move.

•Aggressive Approach: This approach involves entering the market immediately after a breakout. It allows you to capture impulsive moves but increases the chance of entering on a false signal.

 

If you want to learn more about trading breakouts, revisit lessons on support and resistance levels to refresh the basics.

Example of Trading Pivot Level Breakouts

 

Let’s examine an example using a 15-minute chart for USD/CHF.

1.Initial Testing:

•In the Asian session, the price hovered slightly above the central pivot level (PP), testing the first resistance level (R1).

2.Breakout and Consolidation:

•During the European session, the price broke R1 and entered a consolidation phase.

•Using the aggressive approach, you could have placed a pending buy order above R1 and opened a profitable position.

3.Retest of R1:

•After breaking R1, the price reached R2 and then returned to R1 for a retest.

•Conservative traders could have opened a buy position here, as R1 transitioned from resistance to support.

4.Further Breakouts:

•After retesting R1, the price broke through R2 and R3 without significant pullbacks.

•Aggressive traders would have profited from buy orders placed above these levels, while conservative traders might have missed these opportunities.

5.End-of-Session Opportunity:

•At the end of the U.S. session, the price bounced off R3, giving conservative traders one last chance to enter the market.

Setting Stop-Losses and Profit Targets

 

Properly placing stop-losses and profit targets is crucial for breakout trading:

1.Stop-Loss Placement:

•After a resistance level is broken, it becomes a support level. Place your stop-loss slightly below the broken level (e.g., below R1 after it becomes support).

2.Profit Targets:

•Profit targets are generally placed at the next support or resistance level. For instance, after breaking R1, the target is R2.

 

Using a trailing stop can help secure profits while allowing you to participate in extended price movements.

Risks of Breakout Trading

 

Breakout trading involves specific risks, such as:

•False Breakouts: Sometimes the market creates a spike, only to reverse back, leading to potential losses.

•Impact of News Events: Unexpected events can cause temporary sharp movements, followed by retracements.

 

To mitigate these risks:

•Compare pivot level signals with other technical analysis tools (e.g., candlestick patterns, indicators).

•Stay informed with an economic calendar and news updates to anticipate market-moving events.

Conclusion

 

Trading breakouts using pivot levels is an effective strategy for dynamic markets. However, success requires incorporating additional signals and managing risks effectively.

 

Remember, breaking R1 does not guarantee reaching R2. Verify breakouts using candlestick patterns, indicators, and news. Practice, adapt to market conditions, and stick to your strategy for consistent results!