One of the most known ways to find support and resistance can be “Pivot Points” these points represent support or resistance levels where the price have to respond as expected. Tradeview offers his tool: Pivot Points Calculator to make your trading operations even easier.
Along this article we will learn how to calculate pivot points and then describe their interpretation and how to use them as a trading tool.
How to calculate pivot points:
There are different ways to calculate pivot points, nevertheless they all share the maximum use, minimum use and closing candlestick of the previous day, we can also use other temporalities where pivot points are weekly or monthly. The daily pivot points are the most used, that´s why I’ll be talking about them on detail in this article:
The easiest and more used way to calculate pivot points is this formula:
H (High) Maximum on previous day
L (Low) Minimum on previous day
C (Close) Close on previous day
P (Pivot Point) R1/R2: Resistance 1 / Resistance 2
S1/S2: Support 1 / Support 2
It’s important to remember that Forex Market runs 24 hours, prices of previous day watches may vary depending on the font where data is obtained from, the close data can be sensible. A much known way is to calculate using the closing time New York (16:00 EST).
Otherwise can be introducing the opening price of today calculating the level P: Where O = Opening Price from today.
The other levels can be calculated using the same formula, just using the P level modified with O.
Use and interpretation of Pivot Points:
Once the pivot points have been calculated they can be introduced over the graphic, if they’ve been calculated with daily data, the can be used with minor temporalities to see how the price responds to these levels.
Pivot point represent itself (P) a primary support / resistance. This means that we can hope important movements of the quotation price marked by this level. The other supports and resistances calculated can generate important movements also, even if they don’t have the same influence that the pivot point.
Pivot points can be used with two main objectives: identify predominant trend in the market and also as input and output market points.
- Identify trends with pivot points: if the price marked by the pivot point is broken in an ascending movement, the market is bullish, if instead the pivot point is broken in a descending movement, the market is bearish. Generally, if the price remains over the pivot point we can say that the market is bullish and vice versus. However, we have to remember that the day which they are calculated and the end of that day they have to be calculated again.
- Input and output market points: pivot points can provide some input and output market points. Pivot points are really useful as a part of a Trading strategy. For example, an order of limit sale can be set in a support level to open, if this support is broken and stoploss can be set to this order in one of the resistances.
Pivot points are one of the most important tools for any trader, success using pivot points depends on the trader’s ability to work with them and other tools in the technical analysis; as indicators, candlesticks or any other trading style.