Pivot PointsWhat Are Pivot Point?
Pivot Points are used in technical analysis to determine critical or decisive levels of support/resistance in order to help with market forecasts.
They are usually calculated daily for the session of the same day and are obtained from a mathematical calculation that takes into account these three values of the day before:
- maximum reached (H)
- minimum reached (L)
- closing price (C)
Obviously they can be calculated in addition to the previous day, even on other time periods. For example, if we calculate them on the last three values of the last week, the pivots obtained will be valid for the whole week, so even if we calculate them on the three values of the previous hour, the pivot will be around the next hour.
The pivot point levels obtained are 7 which include: 1 pivot point (center), 3 supports and 3 resistance levels. The central pivot point is considered a stronger support/resistor than the other 6 and therefore if it will be overcome it will probably produce the acceleration effect referred to as "breakout". In order of importance the first level support/resistance will be more important than the following ones, which are usually only used as exit points from the trade.
How to calculate them
The central pivot point being the average price of the three values is calculated as follows:
AP = (H + L + C) / 3
The calculation of the first levels of resistance or support is shown below:
Resistance 1 = (2 * AP) - L
Support 1 = (2 * AP) - H
The second level of support / resistor is calculated as follows:
Resistance 2 = (AP - S1) + R1
Support 2 = AP - (R1 - S1)
The third level of support / strength is calculated as follows:
Resistance 3 = R2 + (H-L)
Support 3 = S2 - (H-L)
If the market opens above the pivot point (P), the trend for the trading day is likely to be long. If, on the contrary, the market is below the pivot point, the trend for the trading day is likely to be short.
The general principles as explained in SUPPORT/RESISTANCE article are applicable when deploying pivot points.