Wikipedia : A pivot point is a price level of significance in technical analysis of a financial market that is used by traders as a predictive indicator of market movement. A pivot point is calculated as an average of significant prices (high, low, close) from the performance of a market in the prior trading period. If the market in the following period trades above the pivot point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point is seen as bearish.
Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.
There are several different methods for calculating pivot points, the most common of which is the five-point system. This system uses the previous day's high, low and close, along with two support levels and two resistance levels (totaling five price points) to derive a pivot point.
The equations are as follows:
R2 = P + (H - L) = P + (R1 - S1)
R1 = (P x 2) - L
P = (H + L + C) / 3
S1 = (P x 2) - H
S2 = P - (H - L) = P - (R1 - S1)
Here, "S" represents the support levels, "R" the resistance levels and "P" the pivot point. High, low and close are represented by the "H", "L" and "C" respectively. Note that the high, low and close in 24-hour markets (such as forex) are often calculated using New York closing time (4pm EST) on a 24-hour cycle. Limited markets (such as the NYSE) simply use the high, low and close from the day's standard trading hours.
If you would rather work the pivot points out by yourself, the formula used by Mark Mc Rae below:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.
Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.
There are several different methods for calculating pivot points, the most common of which is the five-point system. This system uses the previous day's high, low and close, along with two support levels and two resistance levels (totaling five price points) to derive a pivot point.
The equations are as follows:
R2 = P + (H - L) = P + (R1 - S1)
R1 = (P x 2) - L
P = (H + L + C) / 3
S1 = (P x 2) - H
S2 = P - (H - L) = P - (R1 - S1)
Here, "S" represents the support levels, "R" the resistance levels and "P" the pivot point. High, low and close are represented by the "H", "L" and "C" respectively. Note that the high, low and close in 24-hour markets (such as forex) are often calculated using New York closing time (4pm EST) on a 24-hour cycle. Limited markets (such as the NYSE) simply use the high, low and close from the day's standard trading hours.
If you would rather work the pivot points out by yourself, the formula used by Mark Mc Rae below:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.