Pivot Point Calculation Method
Before we discuss this lesson, we need a prior understanding of support and resistance.
The horizontal support and resistance lines placed on a price chart are known as pivot points.
The prices which are placed are calculated from previous periods price data.
For instance, the previous day’s data is used by daily pivot points.
They are critical for traders, as these are prices which they use for entry and exit.
The support and resistance are strong as it is used by banks, financial institutions and traders.
Pivot points are support and resistance lines which are plotted on our chart automatically.
Daily and weekly pivot points are the commonly used when compared to monthly pivot points.
How do we use pivot points?
Each level of pivot points can be used for support or resistance.
For instance, the level R1 will usually be a strong resistance level.
It is to be noted that, if the price breaks through and returns, it will also be a strong support level.
The more pivots that line up, the greater the potential will be for price to react those levels.
It is a general opinion that, if the price is below the main pivot point, it is assumed to be a negative response and vice versa if it’s above the main pivot point.
There is durability in numbers. Hence the more queue of pivots ensures higher probability for price to react at those levels.
For instance, if a weekly and a daily pivot point are at the same price level, this will ensure considerable support or resistance level.
Types of pivot points
The different types of pivot points spin around the main pivot point or daily pivot.
Once the calculation of the main pivot is done, this is then used to calculate the other successive pivots points.
The pivot points above the daily pivot are termed as resistance pivots, notably R1, R2, etc.
If they are below, they are support pivots, termed as S1, S2, etc.
They are mostly calculated using a 5-point-system. It consists the following:
The median pivot point (PP)
Two resistance levels (R1) and (R2)
Two support levels (S1) and (S2)
Mid-pivot points
Pivot points that are between the pivots points are call mid-pivots.
The mid-pivot between the S1 and S2 is termed as M1.
The mid-pivot between the S1 and the main pivot is M2 and it goes in the same order
Calculating pivot points
When a price is mentioned in the calculation, it indicates to the price of the previous period.
For instance, the closing price is the previous day’s closing price.
Main pivot/Pivot point
Pivot point = (Highest price + Lowest price + Closing price) / 3
The daily pivot point is the main pivot point. All the other levels (R1,S1, etc) spin around this.
Pivot points (above) daily pivot – Resistance lines (R1, R2, etc.)
Pivot points (below) daily pivot – Support lines (S1, S2, etc.)
The first resistance level R1
R1 = (Pivot point *2) – Lowest price
The second resistance level R2
R2 = Pivot point + (Highest price – Lowest price)
The first support level S1
S1 = (Pivot point*2) – Highest price
The second support level S2
S2 = Pivot point – (Highest price – Lowest price)
Calculating mid-pivots
Mid-pivots are half way between the main pivot points. The calculations for mid-pivots:
M1 = (S2+S1)/2
M2 = (S1+PP)/2
M3 = (R1+PP)/2
M4 = (R2+R1)/2
Trading platforms possess tools to calculate pivot points.
The charting packages help with automated calculations.
Enrich template and pivot points
We can download the MT4/ Ami Broker template to change your MT4 charts to the Enrich style and add pivot points to start trading the beginner strategy
Impact of different closing times that affect the calculations
Different markets have different closing prices that will affect the calculations.
For instance, Forex market operates 24 hours. Henceforth finding the closing price is not easy.
We need to be consistent with our data by observing the same closing session.
The stock exchange is different, as it has well defined closing time. Henceforth the closing price can be determined.
The forex market has no open and closing times during the week for the market.
We need to choose the trading session we wish to use for the closing price.
Most common closing times for the major markets
commodity traders
Market Opening Time: 10 am
Market Closing Time: 11.30 or 11.45PM
Market days: Monday to Friday
Calculating weekly and monthly pivots
Weekly calculations:Take OPEN – Sunday night’s session. CLOSE – Friday.
Monthly calculations:Take OPEN from first day of the month. CLOSE – The last day.
Nut Shell:
An overview of the lesson discussed so far….
The horizontal support and resistance lines placed on a price chart are known as pivot points.
Pivot points (above) daily pivot – Resistance lines (R1, R2, etc.)
Pivot points (below) daily pivot – Support lines (S1, S2, etc.)
Subsequent pivot point is calculated from the main pivot point.
Different markets have different closing prices that will affect the calculations.
We need to choose the trading session we wish to use for the closing price.