Pivot Point Calculations: An Essential Tool for Traders

Introduction to Pivot Point Calculations

Pivot Point Calculations are an essential tool in the world of trading, particularly in technical analysis. These calculations help traders to identify potential points of price level resistance or support in the market. They are primarily used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low, and closing prices from the previous trading day. On the subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.

Understanding the Importance of Pivot Point Calculations

Pivot points are predictive or leading indicators, as they are calculated using the previous market data. Traders use these calculations to identify potential turning points in the market. This information can be used to make informed decisions about when to enter or exit a trade, or when to place stop losses or take profits.

Pivot point calculations are not just a tool for day traders. They are also used by swing traders and long-term market participants. Regardless of the time frame, the pivot point calculation can provide valuable insight into potential price action.

How to Calculate Pivot Points

Step 1: Identify the High, Low, and Close Prices

The first step in calculating pivot points is to identify the high, low, and close prices for the previous trading period. These values are usually taken from the daily chart but can be adapted to any time frame.

Step 2: Calculate the Pivot Point

The pivot point is calculated by adding the high, low, and close prices together and then dividing by three. The formula is as follows:

Pivot Point = (Previous High + Previous Low + Previous Close) / 3

Step 3: Calculate the Support and Resistance Levels

There are multiple levels of support and resistance associated with pivot points, usually referred to as S1, S2, S3 and R1, R2, R3 respectively. These are calculated using the pivot point. Here are the formulas:

First Resistance (R1) = (2 x Pivot Point) – Previous Low

First Support (S1) = (2 x Pivot Point) – Previous High

Second Resistance (R2) = Pivot Point + (Previous High – Previous Low)

Second Support (S2) = Pivot Point – (Previous High – Previous Low)

Applying Pivot Point Calculations in Trading

Once the pivot points are calculated, they can be applied to the chart to help identify potential trading opportunities. If the market opens above the pivot point, this is a bullish signal, and the trader should look for buying opportunities. Conversely, if the market opens below the pivot point, this is a bearish signal, and the trader should look for selling opportunities.

The support and resistance levels can also be used to identify potential profit targets or stop loss levels. For example, if a trader goes long (buys) at the pivot point, they might set their profit target at the first resistance level (R1) and their stop loss at the first support level (S1).

Conclusion

Pivot point calculations are a valuable tool for any trader. They provide a simple yet effective method for identifying potential turning points in the market. By understanding how to calculate and apply pivot points, traders can make more informed decisions and improve their trading performance.