Equitimax - Pivot Breaker

Equitimax
User Guide
PivotBreaker
Brought to you by Equitimax
A trading method for forex

PivotBreaker - 2 of 26 Equitimax
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.

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.

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.
Daily Pivot Points
These levels are widely known, so much so that there is a Wikipedia page describing them. Rather
than duplicate that excellent article here, click this link to read it.
The only confusion with calculating daily pivot points in forex arises because during the week the
markets do not close – so there is no universally accepted time the 'day' ends. We use what is
perhaps the most popular definition, that the day ends at 5pm New York time.
The pivot points calculation delivers 7 price levels denoted P, R1, R2, R3, S1, S2, and S3. These
levels are recalculated each day at the end of the day using the previous day's information..
Most charting packages include pivot points, but their definition of the end of day may be different,
resulting in different levels. Provided with this user guide is the indicator for Metatrader that we
use, Daily Pivot Points Shifted.mq4. Thanks to Swingtree Ltd for the basic code.
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.
Illustration 1: EURUSD hourly, June 2011

A perfect buy trade
Let's first work through a perfect buy trade setup. We'll look at less-than-perfect setups later, in the
examples.
Illustration 2 shows the trade in hindsight.
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.
Illustration 2: A successful buy trade

Buy step 1. Wait for resistance against R1 or R2.
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.
Illustration 3: Price resistance at R1

Buy step 2. Wait for the resistance level to break.
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.
Illustration 4: A strong up candle breaks the resistance

Buy step 3. Calculate the entry, exit and risk.
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.
Illustration 5: Trade entry and exit levels

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

Buy step 4. Calculate the size.
Consider restricting your risk per trade to no more that 1% of your account until you are
comfortable that the PivotBreaker trades are making an overall profit.
If your account is small you may not be able to do this, so instead keep the trades at the minimum
size.
Decide beforehand the maximum drawdown you are willing to tolerate. This could be in the order
of 25% of your account balance, it is up to you. If your balance falls below that level, you should
stop trading and re-evaluate, by perhaps demo or paper trading for a while.
You can use an online tool to help you get your risk right. One such tool is at www.forexcalc.com.
In our example, let's say we have $12,000 in our trading account.
Risking 1%, we will be setting our stop loss at $120.
The stop loss is 18 pips.
Let's assume that a one pip move is $US10 for a standard lot (100,000 units), as it is for those pairs
where the US dollar is the quote (second) currency, such as AUDUSD, EURUSD, or GBPUSD.
Price movement values for cross rates are provided at the above website.
So, in our example:
$US per pip = $120/18 pips, which is $6.67 per pip.
If one standard lot is $10, then we can trade 6.67/10 lots, which is 0.67 lots or 66,667 units on this
trade.
It is not necessary to be absolutely precise in this measurement – a one pip slippage or better fill
will change the risk or reward anyway, as will brokerage if you use a commission broker.
For the expert
After some practice, you will be able to vary the profit target in line with the minimum reward. If
yesterday was a narrow range day, then today's pivot points will be close together. Of course
because yesterday was narrow range doesn't mean to day will be, so you may wish to choose a more
distant target for the trade to improve the reward/risk ratio. Choose wisely – look for some previous
resistance level (if buying) where the price is likely to stall. Or if your trade is at R1, you could look
to R3 as the profit target instead of R2.
Likewise, you may see a compelling reason why the stop loss could be tighter than the low of the
setup candle, such as when the setup candle is longer. (As a rule, don't trade after very long setup
candles, usually the reward/risk will warn you of this).
Until you are well practised, stick with the next R level as the profit target, use the low of the setup
candle as the stop loss and skip the trades that don't meet the 2:1 reward level.

Buy step 5. Cancelling the trade
With this trading method we are seeking to exploit a trend. We use the R level as resistance, and
once it is convincingly broken we want it to turn into support. As time passes, the chance of the
level remaining as any significant support diminishes.
The ideal trade comes back to test the R level within the next hour. Hourly charts have a tendency
to show their true direction towards the end of the hour, so if the price is falling after (say) quarter
to, the chance of success is reduced.
For the sake of simplicity, in our trading we cancel the order at quarter to the hour if it has not yet
been hit. But there can be exceptions to this that you may wish to consider.
If the candle after the setup candle is small and does not retrace to the buy price, you may wish to
wait for another candle. The same time rule applies to the second candle. If the buy price is not hit
within the first three quarters of the hour, cancel the trade.
As each setup is slightly different some subjectivity is inevitable. Examples are shown later.

Buy step 6. The Outcome
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.
Illustration 6: Successful completion of the trade

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.
Illustration 7: A perfect sell trade

Sell step 1. Wait for support at S1 or S2.
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.
Illustration 8: Price support at S1

Sell step 2. Wait for the support level to break.
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.
Illustration 9: A strong down candle breaks the support

Sell step 3. Calculate the entry, exit and risk.
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:
Illustration 10: Trade entry and exit levels

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

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.
Sell 6: The outcome
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.
Illustration 11: Successful completion of the trade

Market Selection and monitoring
The method works on all currency pairs, but on pairs with smaller bid/ask spreads there will be
more trades that satisfy the reward/risk requirement.
A suggested list of pairs to monitor is:
AUDCHF, AUDJPY, AUDUSD, CHFJPY
EURAUD, EURCAD, EURCHF, EURGBP, EURJPY, EURUSD
GBPAUD, GBPCAD, GBPCHF, GBPJPY, GBPNZD, GBPUSD
NZDUSD, USDCHF, USDJPY
Check the spread for each on your trading platform. Some, like GBPNZD may have a spread that is
too large to make it worth watching.
Most charting packages provide templates and a standard pivot point indicator., so an easy approach
is to set up a template with an hourly chart for each pair you are monitoring and apply the pivot
point indicator to each.
It is not necessary to look at the charts every hour as the S or R line must show support or resistance
before the setup candle. So checking the charts every two to three hours should suffice.
Once you see the required support or resistance, you'll need to watch that market each hour on the
hour in case a setup candle occurs.
One of the advantages of this method is that once a trade is entered, there is no need to monitor it,
as the pre-determined stop loss and profit target are not adjusted.
Time of Day
Choose trades when there is momentum in the market. The time period after London closes and
prior to Sydney/Tokyo opening is not recommended, as the market during that time can be without
much direction. It is suggested that you watch for trades primarily during the London/European
Session.
We watch for trades during the Asian and London session, including the crossover between London
and New York.
A handy way to check the sessions is this website. You can enter your own time zone and check the
best times for trading.

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.

Example 1
The setup candle is shown at the dotted vertical line.
This is a losing trade, after the entry the price fell back to below the low of the setup candle.
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.
Illustration 12: Example: a loss

Example 2
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.
Illustration 13: Slow but profitable trade

Example 3
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.
Illustration 14: No retracement

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.
Illustration 15: Insufficient Reward/Risk

Example 5
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.
Illustration 16: Another one to avoid

Example 6
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.
Illustration 17: Discretion required

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