Pivot Point + Psychological Resistance

May 31, 2013

I had been watching the EUR/USD market off and on for nearly six hours before I finally took a set-up I felt would be worth taking. The EUR/USD had been pretty lifeless the entire morning and based on the image you can see that there really wasn’t a whole lot going in your favor if you were looking for a solid support or resistance trade. There was nothing worth taking so I simply didn’t trade.

Yet the entire morning the one level that stood out to me as a potential area to trade was the 1.3000 level. The market tends to be very sensitive to major price levels and 1.3000 can be a prime trading opportunity on the EUR/USD. Furthermore, my resistance 1 line was about a pip under 1.3000, and could potentially provide a sound trading opportunity with those two things working in my favor.

Finally, just before 6AM EST price ventured up to 1.3000. The last four bars were bullish, but the pair didn’t seem overly motivated momentum-wise to breach 1.3000. That price level hadn’t been tested yet that morning and the pair had just been ranging steadily, so I figured 1.3000 would have a strong enough chance to hold. Therefore, at the touch of 1.3000 I took a put option.

put option at 1.3

Initially there was a false break of the price level by about five pips, which wasn’t overly surprising. Although it might not be the most comfortable feeling staring at a huge 13-pip green bar right after you take a put option, I was still quite optimistic that the trade would work out. It would have definitely surprised me if the pair broke such a massive psychological resistance level despite having undergone only ranging action the entire morning. Sure enough, it was a false break and price dipped back below 1.3000. The trade was twenty pips in my favor at one point before closing out as a 14-pip winner.

I didn’t watch the market at all after that, but you might be wondering whether I would have traded 1.3000 again if it had I been watching the pair past 9AM. The answer would definitely be no. Based on the price action between 8:00-8:45, another put option at 1.3000 would have remained a possibility given the fact that the market had significantly retraced (by about 60 pips) from the touch of 1.3000 earlier. This would have told me that the pair had a decent chance of remaining under 1.3000 for the day. However, the pair entered a retracement on the 8:50 candle and as you can see it turned out to be  very weak. By the 9:00 candle you can observe that the pair resumed it’s trek nothward. Combining the clear upward bias of the past hour and the fact that the retracement was so weak, a breach of 1.3000 would have seemed very likely.

Considering 1.3000 for call options (using 1.3000 as a level of support) would have been a distinct possibility in that scenario if a breach of the level had occurred (i.e., an open and close above 1.3000). Call options at strong areas of potential support can be very effective in the context of a general uptrend. But the pair showed a clear upward bias all the way up to the green resistance 2 line (1.30578). Once it got to that point in the market, price action – notably the red pinbar (10:20 candle) – suggested that a reversal would be in store. A trade on the touch of resistance 2 on the 10:25 candle would have been another solid set-up. All in all, based on twelve hours of market data (six of which I monitored live), those are the only two set-ups I would have considered taking on that particular trading day.

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