We know that pivot points are no different from the typical support and resistance levels. We also saw how these levels were respected when trading a ranging market. But, could it used to trade breakouts? Let’s find out in this lesson.
Just like your normal Support and Resistance, the pivot levels don’t hold forever. At one point or the other, the price breaks out from these levels. In our range strategy, we always hit buy at the support and sell at the resistance. But there are times the market breaks from these levels and stops us out. When such things happen, we can develop another plan ready for the same and take advantage of it.
In the trading community, there are two types of traders: aggressive traders and conservative traders. And the approach to trade breakouts is different for both. So, we made two strategies to benefit the aggressive as well as the conservative traders.
The Pivot Points Breakout Strategy
Doing it the Aggressive way
The aggressive approach to trade breakouts is very simple. The strategy for such traders is to trigger the trade when the price breaks above resistance or below the support. The logic to this is that the resistance/support which was supposed to hold is now not being respected. It means that the opposite party is showing more strength. Hence, we will also be following the stronger side.
Aggressive traders are the ones to catch the initial move of the breakout. But there is high risk involved in these types of entries.
Below is the chart of GBP/CHF on the 15min timeframe. The pivot points are marked as shown. Initially, we can see that the price broke below S1 support. Here, aggressive traders can get in for a sell after the close of the candle. Later, the price continued to fall down and ended up breaking the S2 support as well. This could be another entry for the aggressive breakout traders.
As aggressive traders, it is important to have good risk management on the trades. The most basic necessity is the placement of stop-loss and take-profit orders. For the above trades, traders can keep the stop-loss just above the level they entered the trade. However, it would be better to place the stop-loss much higher than that level because we can stay safe from spikes. And a typical TP would be the next Support level. Refer to the above chart to get better clarity on it.
Doing it the Conservative way
The conservative approach is more of a safe approach to trade breakouts. According to this strategy, look to enter the trade when the price retests the level after breaking through that level. In trading terms, this is called the ‘role reversal’ concept. This concept simply means the turning of ‘support into resistance’ and ‘resistance into support.’ For example, when the price breaks below the support level, it is not a ‘support’ anymore; but is now ‘resistance.’ Now, let’s put this into action.
Consider the same chart shown above. We shall be looking if there are opportunities for conservative traders in the same market. In the below chart, we can see that the market broke below the S1. So, now we treat S1 as the resistance and prepare to sell when the price retraces to the S1 level. Similarly, we can enter for a sell when the price breaks below S2 and retests back to S2.
When it comes to the placement of stop-loss and take-profit, one can follow the same approach, as explained in the aggressive traders’ placement.
This brings us to the end of this lesson. Note that the above strategy is only to get an understanding of how to trade breakouts using pivot points. It is highly recommended to apply other technical tools to have more odds in your favor. Cheers.