How to Use Pivot Points to Get Better Entries and Keep Your Emotions in Check

Posted On 04 Aug 2014

There’s a common belief that most market moves are the result of two emotions, greed and fear. However, it may be appropriate to look at greed as another side to the same coin of fear because greed is often acted on in the fear of missing out of a ripe trade. Naturally, emotionally entries are rarely good entries and we’ll take a look at using pivots to keep your emotional reaction out of trading so that you can objectively find good entries on the emotional extremes of others.

Emotions Gone Wild

Recently, a very important question was asked. The question could be boiled down to, why do low balance traders consistently underperform high-balance traders across the board? The answer is important for traders of all balances.

The answer summed up is that traders with a low balance are more likely to need the money in their account for other expenses and thus are more likely to act on fear. The antithesis is the high balance accounts that have a specific advantage over the little balanced traders. In one phrase, they do no need the money or the markets and can therefore, act with little or no emotion. Put another way, traders who don’t need the market are “Fearless.”

Emotions often go hand in hand with great trade management.

Using Pivots to See Common Technical Extremes

Without pivots, it’s easy to chase price. If you’re not familiar with the concept of chasing price, it is akin to entering on an extended move. However, a similar flaw that many traders come up against is fading a strong trend. These seem like opposing forces and therefore, at least one of these groups of traders should overall be successful. However, if traders are emotionally guided, they will continue to enter and exit on excitement, which can be fatal to growing an account balance.

Weekly Pivots on USDCHF Allows Traders to See the Forest for the Trees.

Presented by FXCM’s Marketscope Charts

This morning saw one of the more aggressive USD selling routs of 2014. While there are a handful of explanations to the selling, the emotional pull to chase price and sell on an extended move warrants caution. As you can see above, the weekly pivot S2 level was hit on Monday morning of the week of June 30th. This means an extended move opening the week and chasing that price could prove costly when you consider recent extreme moves in relation to weekly pivots.

Historical Pivots on USDCHF Favor Fighting the Temptation to Chase

Presented by FXCM’s Marketscope Charts

Finding Great Range Entries of Pivots

We’ve covered how emotional markets can be and therefore, you should remain methodical. One way to be methodical is to wait for a favorable entry that aligns with a technical convergence through pivots and or other levels. Only then, you can take a low risk: high reward trade that over time can help you trade your way toward your trading goals.

Many Levels Align on EURUSD for the Patient FX Trader