Just like normal support and resistance levels, pivot levels will not work all the time.

Using pivot points for trading deals works, but not always. In case these levels do not work, you should have a tool in your Forex toolbox ready so that you can use the situation to your advantage!

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As we said in the previous lesson, there are two main ways to deal with failures: the conservative approach and the aggressive approach.

Both methods will work well. Just keep in mind that if you take a conservative approach, which means waiting to touch or retest support or resistance, you may miss the initial move.

Use Pivot Point to deal  with possible failures

Let’s take a look at the chart so we can see how to make a breakout using pivot points. Below is a 15-minute EUR / USD chart.

 

How to use pivot points to deal with failures?

Here we see that EUR / USD has had a strong rally during the day.

We see that EUR / USD has opened with a bullish chat above the pivot point. The price has started a strong uptrend before stopping slightly at R1.

Eventually, the resistance broke and the 50 pp pair jumped!

If you used the offensive method, you would have taken the initial step and celebrated and danced, as if you had won the World Cup.

On the other hand, if you chose the safe method and waited to touch again, you would become a sad little trader. The price has not been touched and re-tested after breaking the R1. In fact, exactly the same thing happened with R2!

Notice how EUR / USD buyers have tried to steer the trend to R3 as well.

However, if you were to take the offensive approach to the R3 as well, you might be caught in a fake move and deceived as a result of the price weakening after the initial failure. If you set the loss limit too narrow, then you would go out with the loss limit.

Later, however, you see that the price is finally broken. Notice how the re-broken resistance line is also touched.

Also, see how the pair has returned over the course of the day and broken and passed R3. There was also the opportunity to get a sale by re-touching the resistance that has become supportive. (You should probably read the last sentence twice!)

” Role reversal “

Remember that when support levels are broken, they usually become resistance levels.

The concept of “role reversal” also applies to broken resistances that become supportive. These will be good opportunities to adopt a safe approach.

How to set the loss limit and profit limit in the failure transaction

One of the most difficult things to do in a breakout is choosing where to place the loss.

Unlike range trades or suffering where you seek to break Pewter support and resistance levels, here you are looking for fast and strong moves.

Once a level is broken, in theory, that level is likely to become “resistance-supported” or “supported-resistance.” Again, this is called role reversal… because roles are reversed.

If you made a purchase and broke the price of R1, you could put your loss limit just below R1.

Let’s go back to the EUR / USD chart to see where you could put your losses.

When it comes to setting goals, your goal will usually be the support level or resistance level of the next pivot point as a profit margin.

It is very rare for a price to cross all levels of pivot points unless a major economic event or surprise news comes out.

Let’s go back to the EUR / USD chart to see where we should put these losses and where we should take our profits.

 

How to use pivot points to deal with failures?

In this example, as soon as you see that the price of R1 has broken, you should have set your loss limit just below R1. Of course, we do not mean just below point R1, because the noise in the market may activate your stop unnecessarily. It is best to place a low candle or a point to which the market has reacted.

If you believe that the price will continue to rise, you can hold your position and move your loss limit manually (trail) to see if the movement continues or not.

You need to carefully monitor the price and adjust the loss accordingly. We will talk more about this in future lessons.

Like any other method or indicator, you need to be aware of the risks involved in breakout trading.

Failure Trading Risk (Breakout)

First, you never know whether the move will continue or not. In fact no one knows! You may think that the price will continue to rise, but instead, get a floor or a ceiling, it means that you have taken the fake item and been deceived!

Secondly, you are not sure if this is a real failure or just a brutal fluctuation caused by the release of important news!

Unstable spikes are common during news events, so be sure to keep up to date with the latest news and what is on the current day or week economic calendar.

Lastly, just like domain trades or suffering, it is best to consider other key levels of support and resistance.

You might think that R1 is breaking, but note that there is a strong resistance level after R1.

The price may break R1 and cross it, but only test and break the next resistance.

You need to use your Forex knowledge of support and resistance, Japanese candlestick patterns and momentum indicators to get stronger signals as to whether this is a real failure.

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