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PivotBreaker
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Disclaimer
The PivotBreaker is provided to you by Equitimax, free of charge. We provide no warranty or promise of any level of performance, and if you use it, you do so entirely at your own risk. You should be aware that clients engaged in trading foreign exchange on margin are exposed to a high level of risk which may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange during or after you have purchased services or received general advice from us, you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. This trading method may not be distributed by you to other parties without our written consent.
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Introduction
Pivotbreaker is a simple technical method of trading forex: It is provided free of charge. It spends very little time in the market, and so has little exposure to unexpected risk. It operates on hourly price charts so requires no screen watching It uses simple set-and-forget trade entries to minimise emotion while in a trade. It does not use any 'wiggly line' indicators. Used wisely, it makes a good part time return. It makes about 10 trades per month, generally with about half of those being winners. The rules ensure winners are bigger than losers.
For the impatient, here is a summary of the basic rules. A more detailed explanation with examples follows. Be sure to read through the examples after the rules are explained. They contain other tips for identifying good setups.
Summary of Rules
Using an hourly chart, draw daily pivots lines R1, R2, R3, S1, S2, S3 based on start of forex day 5pm New York time. For buy trades Wait for R1 or R2 to provide resistance to the price. Wait for a price candle (the setup) to decisively break the resistance and make the highest close of the last 24 hours. Set a buy trade entry at the R level just broken. Set the stop loss at the low of the setup candle. Set the profit target at or below the next R level above so that the reward/risk is at least 2:1. If the trade does not enter in the next 45 minutes, cancel the trade. For sell trades Wait for S1 or S2 to provide support for the price. Wait for a price candle (the setup) to decisively break the support and make the lowest close of the last 24 hours. Set a sell trade entry at the S level just broken. Set the stop loss at the high of the setup candle. Set the profit target at or above the next S level below so that the reward/risk is at least 2:1. If the trade does not enter in the next 45 minutes, cancel the trade.
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Details
This is not a 100% mechanical trading method very little that is totally mechanical works well. It is the extra element of discretion that makes the method successful. Our traders are well versed at watching the setups and from experience will dismiss many setups immediately. Let's break the method down and look at each step in detail.
Illustration 1: EURUSD hourly, June 2011 Illustration 1 shows the EURUSD pair during June 2011 and the daily pivot levels. Look at how often the pivot lines acted as support or resistance. Pivotbreaker uses these levels for trade entry and exit. In the illustrations, the Resistance lines R1, R2 and R3 and shown in red. The pivot point is blue, and the support lines S1, S2 and S3 are green.
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Illustration 2: A successful buy trade Prior to the entry, the price had difficulty breaking above the R1 level. When it did, on the setup candle, the movement was strongly bullish and closed clearly above the R1 level. This is the trigger to place the trade entry order. The buy is placed at the R1 price level. The trade target is at R2 and the stop loss is at the low of the setup candle. Using this example, we will run through the steps for a buy trade.
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Illustration 3: Price resistance at R1 The first requirement is that R1 or R2 provides resistance to the price. We take buy trades when the price is above the daily pivot line (shown in blue in Illustration 3). In Illustration 3, and prior to our setup candle which has been blanked out, the price was trading below the R1 level for several hours. It is not necessary for R1 to provide this much resistance but it must be evident that R1 has stopped the price temporarily. If the price approaches R1 or R2 in a strong uptrend and then stalls for one candle before breaking through, it still qualifies as a setup. We use R1 and R2, but not R3 for these setups for two reasons: 1. By the time the price reaches R3 it is already well extended for the day. 2. We do not draw R4 (the price rarely reaches that far in a day), so there is no logical target.
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Illustration 4: A strong up candle breaks the resistance Now we have some action. The last candle on this chart is our setup candle, and to qualify as a setup candle it must: 1. Make the highest closing price for two trading sessions (16-18 hours), or better still, the last 24 hours. It does not need to make the absolute highest price during that time (although this setup candle does). Sometimes a previous candle wick spiking above the R level may be higher than the setup candle - and that's acceptable so long as it's not overly long. 2. Have relatively small wicks compared to the body of the candle. As a rule of thumb, the body should be at least 50% of the candle length. 3. Close far enough above the resistance level (here R1) to be able to say that it has cleared the resistance level convincingly. If it closes just a couple of pips above, it does not qualify.
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Illustration 5: Trade entry and exit levels Three prices are marked on the chart. 1. R2 at 86.15 2. R1 at 85.74 3. The lowest price of the setup candle, 85.59 To enter the trade, we need the price to fall back to 85.74. The closing price of the setup candle is not important for the purpose of setting the trade. If you use Metatrader, you may be aware that the price candles on the charts are drawn showing the Bid price, or the selling price. Other charting packages allow you to show either the bid or the ask prices on the chart, and some show the average between the two. We'll work this example as if the chart shows the bid prices. We want to enter the trade at R1, 85.74, and we will be buying, looking for the price to move to R2. But 85.74 is the sell price at R1, so we need to add the spread to get the buying price. The spread on this market is 3 pips, so our trade entry price will be 85.74 + .03, i.e. 85.77. Now we can work out the potential profit and stop loss. To close the trade we will be selling at either 86.15 or 85.59. The prices are as shown on the chart, no adjustment for spread is needed as the chart already shows the selling prices.
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To calculate the profit subtract the entry price from the target: 86.15 85.77 = 38 pips. To calculate the stop loss size subtract the stop loss from the entry price: 85.77 85.59 = 18 pips. The ratio of reward (profit) to risk (stop loss) is then 38 / 18 = 2.1:1 Taking trades where the reward is less than double the risk is not advised. As we are looking to take trades in the direction of current price movement and momentum, it is reasonable to have this requirement. This trade's reward is more than double the risk, so we can place the trade. The order is then: Buy at 85.77 (a limit order) Target (limit) 86.15 Stop loss 85.59
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Illustration 6: Successful completion of the trade The trade was completed within the next hour, a very rapid outcome. Approximately half of the winning trades will complete within the next two candles. If the trade does not, be patient. It is more likely to finish favourably if you are trading with the trend than to reverse and cause a loss. This trade example has been used because it is picture-perfect. Of course not all trades are like this one.
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Illustration 7: A perfect sell trade The sell trade is exactly the opposite of the buy trade. In Illustration 7, prior to the entry, the price had difficulty breaking below the S1 level. When it did, on the setup candle, the movement was strongly bearish and closed clearly below the S1 level. This is the trigger to place the trade entry order. The sell is placed at the S1 price level. The trade target is at S2 and the stop loss is at the high of the setup candle. Using this example, we will run through the steps for a sell, or short trade.
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Illustration 8: Price support at S1 The first requirement is that S1 or S2 provides support for the price. We take sell trades when the price is below the daily pivot line (shown in blue in Illustration 8). In Illustration 8, and prior to our setup candle which has been blanked out, the price was trading above the S1 level for several hours. When the price tried to get below S1 it quickly reversed, as you can see by the tails below the candles in the ellipse. As with the buy trade example above, it is not necessary for S1 to provide this much support but it must be evident that S1 has stopped the price temporarily. If the price approaches S1 or S2 in a strong downtrend and then stalls for one candle before breaking through, it still qualifies as a setup. We use S1 and S2, but not S3 for these setups for two reasons: 1. By the time the price reaches S3 it is already well extended for the day. 2. We do not draw S4 (the price rarely reaches that far in a day), so there is no logical target.
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Illustration 9: A strong down candle breaks the support The last candle on this chart is our setup candle, and to qualify as a setup candle it must: 1. Make the lowest closing price for two trading sessions (16-18 hours), or better still, the last 24 hours. It does not need to make the absolute lowest price during that time. (Although this setup candle does). Sometimes a previous candle wick spiking below the S level may be lower than the setup candle - and that's acceptable so long as it's not overly long. 2. Have relatively small wicks compared to the body of the candle. As a rule of thumb, the body should be at least 50% of the candle length. 3. Close far enough below the support level (here S1) to be able to say that it has cleared the support level convincingly. If it closes just a couple of pips below, it does not qualify.
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Illustration 10: Trade entry and exit levels Three prices are marked on the chart. 1. S1 at 1.0543 2. S2 at 1.0508 3. The highest price of the setup candle, 1.0557 To enter the trade, we need the price to rise to 1.0543. The closing price of the setup candle is not important for the purpose of setting the trade. As with the buy trade example, we'll work this example as if the chart shows the bid prices. We want to enter the trade at S1, 1.0543, and we will be selling, looking for the price to move to S2, so there is no need to adjust this price for the spread. The spread on this market is about 2 pips, which we need to know to work out the potential profit and stop loss. To close the trade we will be buying at either 1.0557 or 1.0508. As we are buying, and the chart shows the selling price, we need to add the spread. So the exit price will be either 1.0559 or 1.0510. To calculate the profit you subtract the target from the entry price: 1.0543 1.0510 = 33 pips. To calculate the stop loss size subtract the entry price from the stop loss:
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1.0559 1.0543 = 16 pips. The ratio of reward (profit) to risk (stop loss) is then 33 / 16 = 2:1 (approx) This trade's reward is double the risk, so we can place the trade. The order is then: Sell at 1.0543 (a limit order) Target (limit) 1.0510 Stop loss 1.0559
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Sell step 4. Calculate the size. Sell step 5. Cancelling the trade. The rules for these two steps are the same as for the Buy trades.
Illustration 11: Successful completion of the trade The trade was completed within two hours, a typical outcome. As with the buy trade, this example has been used because it is picture-perfect.
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Examples
The secret to success with this method lies in the ability to choose good setups. There are many factors to consider, and a simple strong bullish or bearish crossing of the S or R line is not enough to guarantee profit over time. Reading through these examples will help. Later, you'll need to do your own market research by scrolling back in time through some charts so you can gain confidence in the method. You will see that there are only a small number of good setups on any single market and the trade frequency comes from monitoring multiple markets.
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Example 1
The setup candle is shown at the dotted vertical line. This is aIllustration losing trade, after the entry the price fell back to below the low of the setup candle. 12: Example: a loss At first glance it appears to conform to all the requirements for a buy trade - there is resistance at R1, the resistance is broken by a strong up candle which shows the highest price for a while, and the price retraces to R1. However, indications that this may not have been a perfect setup are: The price had moved very quickly from the pivot level to R1, so it needed time to rest. When the price was at the blue pivot level, it made a lower low (the first was at the start of the day below the 'R1' label). So the move upwards to R1, while making the highest close for a while, was not really part of a good uptrend.
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Example 2
Illustration 13: Slow but profitable trade Illustration 13 shows a winning trade that took a long time to complete. This trade continued after the change of day and the recalculation of the pivot lines. In this case, the new R1 was very close to the old R1 so the existing R1 was still a sensible exit point. If you are in a trade when the day rolls over it is worth looking at the pivot lines to see how different the new and old are. You may choose to adjust your profit target. This does not happen often enough to make a hard and fast rule about how to handle it. Most trades complete in far fewer candles than this one. If in doubt, leave the trade as it was originally set. If you choose to move the profit target, make sure you stick to at least 2:1 reward for your risk.
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Example 3
Illustration 14: No retracement You will see many cases like this. A good uptrend, resistance around the R level (R2) and a good setup candle. You place the order, but the market never retraces, and goes on to reach the profit target without you on board. Don't be concerned about this. We must have the retracement to satisfy the reward/risk. Without it, your risk is too high. Cancel the trade and wait for the next one. There is one other point to note about this setup. The low price of the setup candle is very close to R2, so the stop loss would be very small. With such a small stop loss, the chance of being stopped out is very high. In this trade, you could have adjusted your stop loss to be below the small candle before the setup candle. This looks a much better place for the stop. The risk/reward would still be satisfied and the probability of success increased.
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Example 4
This trade setup looks good, and from the chart the reward looks to be double the risk, but after checking and including the spread it did not work out that way. 1.7:1 is too small. Pass this one by.
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Example 5
Illustration 16: Another one to avoid Illustration 16 shows another situation to avoid. The setup candle crossing R1 was preceded by only weak resistance at R1, but worse, the setup candle is the 7th consecutive upwards price candle. At this point there is a strong chance the market will retrace more than the length of the setup candle. You can see in the subsequent candles that the price supported at S, predicted by the previous high price at R. It is quite common for a resistance level to later become a support level like this. The combination of clues should prevent you from trading setups like this unless you can place your stop loss further away and still maintain the required minimum 2:1 reward to risk.
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Example 6
Illustration 17: Discretion required At the vertical line in Illustration 17, there is a good trade setup. The reward to risk is 2.5:1 so the order can be placed. The trade is slow to produce results, and when the day changes, the pivot lines are recalculated. The previous target S2 no longer provides the support expected and is no longer a logical target. Had the price action been stronger or S2 a little closer it would have been sufficient just to let the trade run its course, however, after seeing the sideways price movement in the new day (Not uncommon through the Asian session) it would have been prudent to either exit the trade at market or bring the target a little closer to the new S1 level, nS1. As you can see the trade failed to reach its original price objective by a very small margin, and it would be a shame to take a loss after being so close to profit.
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