Pivot point trading is a relatively old strategy but one that is still very relevant even in today’s highly sophisticated markets. A LEADING INDICATOR, originally used by floor traders with a short-term focus, they can give good returns if used consistently.

**We will look at 3 types:**

*Standard Pivot Point*

*Fibonacci Pivot Point*

*Demark Pivot Point*

__ __

## Introduction

Pivot points are technical indicators used to define specific support and resistance points for a given instrument.

They are calculated using the previous trading day’s high (H), low (L) and close (C) prices for the stock. Pivot points were originally used by floor traders to give them indications of the range where the stock price would likely trade.

The pivot points give price levels where trends tend to reverse direction.

**Key inputs:**

Period – the time frame you are calculating

High

Low

Close

Open

Most traders today make use of the 5-point pivot system that consists of five pivot points.

The Pivot Point - BASE

Support 1 - S1

Support 2 - S2

Resistance 1 - R1

Resistance 2 - R2…

**RULE** – These levels would be used during the following period, once set they do not change

**Calculating the Standard Pivot Point:**

The first and most powerful anticipated support/resistance reference point for today’s trading is called the “pivot point”.

This is the simple average of the periods high, low & close

Formula

Pivot Point (P) = (High + Low + close)/3

Next, we extrapolate how far we expect the market to move up or down from the pivot point.

Based on the 5-point pivot system, we further make two projected levels of resistances above the pivot points.

The first level of resistance is “R1” and the next higher level of resistance is “R2”.

Next calculate RESISTANCE 1 & 2

Formula

Resistance 1 (R1) = (P x 2) – Low

Resistance 2 (S2) = P – (High – Low)

In the same way we make projections for two levels of support below the pivot points, the first level of support is “S1” and the next lower level of support is “S2”.

Next calculate the SUPPORT 1 & 2

Formula

Support 1 (S1) = (P x 2) – High

Support 2 (S2) = P – (High – Low)

There are a number of variations to the calculation of the pivot points but below is the most commonly accepted set of formulae.

Pivot Point:

P = (H + L + C)/3

Pivot Resistance Points:

R1 = (2 * P) - L

R2 = (P - S1) + R1

Pivot Support Points:

S1 = (2 * P) - H

S2 = P - (R1 - S1)

**Fibonacci Pivot Points**

Start with the Standard Base Pivot Point

Formula

P = (High + Low +Close)/3

Support 1 (S1) = P – [0.382 x (High – Low)]

Support 2 (S2) = P – {0.618 x (High – Low)}

Support 3 (S3) = P – { 1 x (High – Low)}

Resistance 1 (R1) = P + { 0.382 x (High – Low)}

Resistance 2 (R2) = P + { 0.618 x (High – Low)}

Resistance 3 (R3) = P + { 1 x (High – Low)}

**Demark Pivot Points**

Start with a different BASE that is conditional on the relationship between the close and open

If Close is < Open, then X = High + (2 x Low) + Close

If Close is > Open, then X = (2 x High) + Low + Close

If Close is = Open, then X = High+ Low + (2 x Close)

Pivot Point (P) = X / 4

Support 1 (S1) = x / 2 - High

Resistance 1 (R1) = x / 2 – Low

### Trading with pivots

The various pivot points present levels of support attracting buyers and levels of resistance attracting sellers.

Entry and exit rules are essential for profitable trading as is the case with any trading strategy.

We now consider simple trading rules with pivots.

The Pivot Point (P) sets the tone for price action; In general, should the opening price be above the Pivot Point (P) then the stock price tends to stay above it signaling a bullish trend for the day with first resistance at R1.

If R1 is broken then further resistance will be expected at R2.

A move above (P) is positive and shows strength

With target at first Resistance (R1)

A break above (R1) sets the target to (R2)

Converse is true on the downside

Below (P) shows weakness with target (S1)

Breaching (S1) shows more weakness to (S2)

The converse is true on the downside. Should the opening price be below (P) then the stock price tends to stay below it giving a bearish outlook for the day. In this instance first support will be found at S1 and if it is broken then further support will be met at S2.

If during the day the stock trades at the R2 or S2 levels, there is a tendency for the price to revert back to the pivot point P.

We realize that comparing the stock opening price with the pivot point P might be misleading hence jeopardizing our trading strategy. We thus propose that we watch the stock movements during the first 30 minutes of trading and then make use of the volume weighted average price (VWAP) thereafter as our “opening price” that we compare with P before we start trading.

Support & Resistance Pivot Points

Use just like traditional support and resistance levels

Watch price action closely when levels come into play

If prices decline to support and then firm, look for a bullish chart pattern or indicator to confirm the reversal

The same on the upside – look for a bearish pattern for a reversal from resistance

**Conclusion**

Start with the direction of crossover (P)

Confirm with other aspects of technical analysis

RSI - Stochastic – MACD – Williams R%

## Comments