Pivot breakout is a trading strategy that utilizes pivot points to identify potential support and resistance levels and make trading decisions based on the breakout of these levels. Pivot points are commonly used to predict future price movements, and the breakout strategy leverages these levels to find trading opportunities.
What is Pivot Breakout?
Pivot breakout is a method used to trade based on confirmed breakouts of support or resistance levels identified by pivot points. Pivot points are divided into several key levels:
- Pivot Point (PP): The central level calculated from the previous period's closing price, high, and low.
- Resistance Levels (R1, R2, R3, etc.): Levels above the pivot point that indicate potential resistance areas.
- Support Levels (S1, S2, S3, etc.): Levels below the pivot point that indicate potential support areas.
How Pivot Breakout Works
- Identify Pivot Points: Determine the pivot point and support and resistance levels based on the previous period’s high, low, and closing prices.
- Wait for a Breakout: Observe if the price breaks through the support or resistance levels. A breakout through these levels can indicate that the price will continue to move in the direction of the breakout.
- Choose a Trading Strategy:
- Aggressive Approach: Enter a trade immediately after the price breaks through a relevant pivot level, without waiting for further confirmation.
- Conservative Approach: Wait for the price to test the support or resistance levels several times before entering a trade. This approach is more cautious and reduces the risk of false breakouts.
Example: EUR/USD Pair
Suppose you are monitoring the EUR/USD chart on a 15-minute time frame. Here’s how you might apply the pivot breakout strategy:
Trend and Pivot Level Observation:
- EUR/USD shows an uptrend throughout the day with the price opening above the pivot point.
- The price continues to rise until it reaches the R1 level and then breaks through it with a 50-pip surge.
Aggressive vs. Conservative Strategy:
- Aggressive Strategy: If you opt for an aggressive approach and open a position as the price breaks through R1, you could potentially gain many pips if the price continues to rise.
- Conservative Strategy: If you choose to wait for a retest of R1, you might miss the opportunity if the price doesn’t return to test R1 after breaking through.
Watch for False Breakouts:
- Suppose the price attempts to break through R3 but fails to sustain the initial breakout. This could be an indication of a false breakout.
- However, if the price eventually breaks through R3 and retests it, this could be an opportunity to sell if the price bounces off R3.
Placing Stop Loss and Take Profit
Stop Loss:
- Place the stop loss below the broken pivot level. For example, if the price breaks through R1, set the stop loss just below R1 to protect your position if the price reverses.
Take Profit:
- Target the next pivot level as your take profit point. Typically, the price will not exceed all pivot levels without significant news or economic events.
Adjusting Positions:
- If the price continues to rise, you can manually move the stop loss to protect gains and maximize profit. Use additional analysis such as support and resistance, chart patterns, and momentum indicators to provide stronger trading signals.
Pivot breakout is an effective strategy for identifying trading opportunities based on pivot levels. Choosing between an aggressive or conservative strategy depends on your risk tolerance and market analysis. By understanding how pivot points work and applying the appropriate strategy, you can enhance your trading success.
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