Pivot Points

In Technical Analysis the significant price levels, which might act as Support and Resistance for the future price movement, are called Pivot Points.

So, previous major highs and lows, Fibonacci levels, Quadrant levels, Tirone levels, Elliot Wave turning points are all act as pivotal points.

A pivot point can also be calculated based on Open (O), High (H), Low (L) and Close (C) prices of the previous trading periods, which can act as a significant indicator of the future price movement. It is a Leading Indicator which may signal a potential new market highs or lows.

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Calculation
Commonly it is calculated as an average of High (H), Low (L) and Close (C) prices of the previous trading periods (daily, weekly, monthly, etc;).

So the formula is: Pivot Point = Sum of High, Low and Close divided by 3
That is,

Pivot = (High + Low + Close) / 3 or P = (H+L+C) / 3



Apart from this, this pivotal point is also calculated by slightly varying the formula.

  • Open price is used instead of Close price.

    P = (H+L+O) / 3

  • Average of Open (O), High (H), Low (L) and Close (C) prices are used.

    P = (H+L+O+C) / 4

  • Close price is used twice to emphasize closing price.

    P = (H+L+C+C) / 4

  • Open price is used twice to emphasize closing price.

    P = (H+L+O+O) / 4

  • Present Open price is used to emphasize the present opening price.

    P = (H+L+O+ Present O) / 4
    OR
    P = (H+L+C+ Present O) / 4

  • Just High (H) and Low (L) are used

    P = (H+L) / 2

  • Just High (H) and Close (C) are used

    P = (H+C) / 2

  • Just Low (L) and Close (C) are used

    P = (L+C) / 2



Here you can calculate Pivot Levels for any time frame.
Just enter High, Low and Close values and press 'Calculate'.

Input:
   
High  
Low  
Close  

Pivot Point

 
  Resistances Supports
1
2
3



Using this pivot point and range of the previous time period six more price levels are also calculated. Three levels below the PP are support levels and they are designated S1, S2 and S3. Three levels above the PP are resistance levels and they are designated R1, R2 and R3.

The first set of support and resistance are calculated by using the upper and lower half of the previous trading range, which is above and below the Pivot point.The first resistance is obtained by adding lower half of the trading range to the pivot.That is Pivot price plus, Pivot minus Low of the previous time period.

Resistance 1 = Pivot + (Pivot – Low)
R1 = P + (P – L) or R1 = 2 X P – L

The first support is obtained by subtracting upper half of the trading range from the pivot.That is Pivot price minus, previous High minus Pivot of the previous time period.

Support 1 = Pivot – (High – Pivot)
S1 = P – (H – P) or S1 = 2 X P – H

The second set of support and resistance are calculated by using full trading range.The second resistance is obtained by adding full range to the pivot.That is Pivot price plus, High minus Low of the previous time period.

Resistance 2 = Pivot + (High – Low)
R2 = P + (H – L)

The second support is obtained by subtracting full range from the pivot.That is Pivot price minus, previous High minus Low of the previous time period.

Support 2 = Pivot – (High – Low)
S2 = P – (H – L)

The third set of support and resistance are calculated by using twice the trading range.The third resistance is obtained by adding twice the trading range to the pivot.That is Pivot price plus, two times High minus Low of the previous time period.

Resistance 2 = Pivot + (High – Low) X 2
R2 = P + (H – L) X 2

The third support is obtained by subtracting twice the trading range from the pivot.That is Pivot price minus, two times High minus Low of the previous time period.

Support 2 = Pivot – (High – Low) X 2
S2 = P – (H – L) X 2

Similarly fourth set may also be calculated by adding and subtracting thrice the range to and from the pivot point.

Apart from these, the mid points between the support levels and resistance levels, also provides minor support and resistance. The mid point between R1 and R2 is designated as M+ and the mid point between R2 and R3 is designated as M++. Similarly the mid point between S1 and S2 is designated as M– and the mid point between S2 and S3 is designated as
M– –.

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S1 and R1 will be at different distance from the P, unless Close is exactly at the center of the range. S2 R2 and S3 R3 will be at equidistant from P.

Apart from these, the mid points between the support levels and resistance levels, also provides minor support and resistance. The mid point between R1 and R2 is designated as M+ and the mid point between R2 and R3 is designated as M++. Similarly the mid point between S1 and S2 is designated as M– and the mid point between S2 and S3 is designated as
M– –.

pivot points, technical indicators, trading indicators, stock trading



Trade Signal
On the next day, price movement above the pivot point usually indicates a bullish trend and price movement below the pivot point indicates a bearish trend.

S1 and R1 offers first target for the intra day trade. In a strong bearish trend when the S1 is broken M– or S2 offers second target and in strong bullish trend when the R1 is broken M+ or R2 offers the second target.

When these support and resistance levels are calculated for weekly range, the prices can go beyond S2 and R2 and reach S3 and R3. Even S3 and R3 may also be broken in very strong trends. However it is wise to tighten the stop losses to protect the profit as the prices reach S3 and R3.

Being a leading indicator it may provide an indication of bullish or bearish trends. However in range bound market the prices may hover around pivot point.

Pivot Point is elaborately explained in the book 'Candlestick and Pivot Point Trading Triggers' by John L.Person.




Click here to buy 'Candlestick and Pivot Point Trading Triggers' + CD-ROM: Setups for Stock, Forex, and Futures Markets







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