Buying and selling currency pairs on the Forex Currency Exchange, or Forex, allows you to make money from the changing values of currency. You can also lose money if you don't understand how the exchange works. When you enter a trade, you simultaneously buy one currency and sell another. Pivot points can help you identify where to enter and exit a trade. A price support level is one pivot point; it's the place on the Forex chart that prices repeatedly fall to before stopping and climbing back up. A resistance level is another pivot point; it's the place on the chart that prices repeatedly rise to before stopping and falling again.
Go to your Forex account and open a currency pair chart. Go to your list of technical indicators and select "pivot points." The software will automatically calculate and draw your currency pair’s pivot points. Look at the price action on the chart. If prices are moving upward, your currency pair is in an upward trend. If prices are moving down, the currency pair is in a downward trend. If prices are moving sideways, the currency pair is range-bound. A currency pair is range-bound when prices repeatedly bounce off the same pivot levels. For example, the EUR/USD (euro/U.S. dollar) is range-bound when it continuously trades between the 1.29000 support and 1.29100 resistance price levels.
Use the pivot points to trade an upwardly trending market breakout. You want to see what happens when the price hits a resistance level. If the resistance level holds, the price will fall back to a support level. If the price breaks through the resistance level, the currency pair could be starting another upward price move. You could buy the currency pair above the resistance level price.
Place a protective stop underneath the resistance level. A protective stop is the price at which you want to close your trade if it starts losing money. For example, if you buy the EUR/USD at 1.25000, you could place your stop loss at 1.24950. Your broker will automatically close your trade at 1.24950 to prevent the trade from losing more money. Your profit target is the next higher resistance level.
Use pivot points when your currency pair is trending downward. Wait to see if the currency pair’s price will break through the support to continue its downward trend. If it does, sell the currency pair below the support price level. Place a protective stop above the support line. For example, if you sell the EUR/USD at 1.25000, you could place your stop at 1.25050. Your broker will automatically close your trade at 1.25050 to prevent the trade from losing more money. Your profit target is the next lower support level.
Use pivot points when your currency pair is range-bound. Look for the currency pair to approach a support or resistance level. If the resistance level holds, sell the currency pair. Place a protective stop above the resistance level. Use the next lowest support level as your profit target. If the currency pair support level holds, buy the currency pair. Place your protective stop below the support level. Your target price is the next highest resistance level.
- During a price breakout, wait for the price to remain above the resistance or below the support levels before you enter a trade.
- Don’t trade with pivot points alone. Use other technical indicators to confirm price movements.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.