Pivot Points: Description and Calculation

Pivot points are extremely useful tool, especially because they are leading indicators. The available really leading indicators are few. These include, Fib extensions and retracements, some indicators such as Oscillator Predictor and Pivot points. Since they are so few, we should not ignore any of them. They give us a huge advantage, because we know them ahead of time.

Another important quality of Pivots is that they are objective – they absolutely do not depend on the person who draws them. So, you and the big guys that trade for big corporations see the same pivot points. This is because pivot points are calculated based on prices of previous trading periods.

You will use the following formulas to calculate pivot point.

Also for simplicity lets mark Pivot Point as “PP”, Pivot Resistance as “PR” and Pivot Support as “PS”:

1. Pivot t = (High t-1 + Low t-1 + Close t-1)/3​

As you can see I add markings “t” and “t-1”. It means that we should use High, Low and Close price of previous trading period to calculate Pivot for current trading period.

Now, traders usually also calculate Pivot Resistance 1, 2 and sometimes 3, and Pivot Support 1, 2 and 3. Here are the formulas:

2. PR1 = 2xPP – Low
3. PS1 = 2xPP – High
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4. PR2 = PP + (High – Low)
5. PS2 =PP – (High – Low)
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6. PR3 = High + 2x(PP – Low)
7. PS3 = Low – 2x(High –PP)

So, that's it. Go and do some practice on your own, and you will see how these levels work wonder.

In my next educational journal, I will write about how you can use pivot points to analyze the market in totality.

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