Pivot points don’t hold on forever. There comes a time when the market moves beyond the pivot points that you see, just like the market moves past resistance and support points at times as well. This is normal and expected. So much so that there is a term used to describe when price action moves outside of the range that it had previously held between pivot points. That term is “breakout”.
When a breakout occurs, traders may choose to trade that breakout in one of two fashions: The safe way or the aggressive way. We will review both options.
Trading Breakouts with Pivot Points
To best understand how to trade breakouts using pivot points, one must first look at a chart of a currency pair and how it functions throughout an average trading day:
As you can see on this chart, resistance against the pair eventually broke, and the pair jumped up very quickly. Had you jumped on the first trade (Breakout #1) right away and bought the currency, you would have gotten faked out. If you had jumped on the second break (Breakout #2), you would be dancing in the streets at your good fortune. You played the currency pair exactly right, and you were rewarded with a big jump in the value of what you purchased. Of course, that would only work if you traded the currency aggressively and did not wait for it to retest the support levels. You would need to have been gutsy and put all of your chips on the table to have profited here.
Those who play it a bit safer and wait for a retest of the support levels before diving in would not have been able to cash in on this one. That is because in this case, the currency did NOT retest support. Instead, it just continued to climb higher. You would have missed out on the chance to get in on this trade at all, and there would be nothing that you could do about that.
At the same time, you need to keep in mind that aggressive trades don’t always work out — as we saw with the first breakthrough entry. Sometimes, the market is pulling a fakeout that ultimately costs the trader significantly if they pull the trigger too soon. The market may appear as though it is breaking out when it is really just about to head in the opposite direction. You need to be nimble on your feet to guess correctly.
Resistance and Support Switch Places
When resistance levels break, they often become the new support line. This means that the role for that resistance line has now reversed and become a support line. The same is true in the other direction. Support lines can become resistance lines in a down market.
Where to Place Stop-Loss and Take-Profit Orders
The challenging part for traders using pivot points to trade breakouts is knowing where to place their stop-loss and take-profit orders. How do you know when you have either profited enough or taken enough of a loss to need to reverse course and do the opposite?
If you are long a currency and it has broken through resistance, then the resistance line may become the new support line. If you want to place your stop-loss order a little below the new support line, then that can be a fairly safe way to play a breakout. You will probably want to enter your take-profit order at the same time. You may place this wherever you would like, but you should make sure that it is at least an equal number of pips away from the current price as that current price is from your stop-loss order. In other words, you always want your risk-reward ratio to be at least 1:1, if not more.
You can always choose to simply hold your trade open and decide where to close it out in profit manually. That is up to you, but if you do decide to take this route, please understand that you will need to keep a very close eye on market conditions as you do so. A news event or new trading pattern could develop in the meantime that costs you all of the unrealized profit that was previously in your account. That said, you could hold the trade open for a significant period of time until you feel that you have squeezed all that there is to squeeze out of the market. Make your trading considerations carefully and don’t be afraid to react when you see the breakout happening.