Pivot Points offer the trader a method of determining support and resistance for a given time frame. Pivots can be used with any time frame, daily, weekly, monthly, even any intra-day chart. A common technique is to calculate Pivots for a variety of time frames using common levels as a way of developing confidence parameters. There are five basic parameters calculated in Pivot Point Analysis. They are the Pivot (P), 1st Resistance (R1), 2nd Resistance (R2), 1st Support (S1) and 2nd Support (S2).
These levels are used in much the same manner as you would trendline support and resistance levels. Many traders us the Pivot level as a trend indicator. Above P, they only go long. Below P, they only go short. Conversely, you can go long against S1 with your stop loss a few ticks below S2. You can go long above the Pivot or above R2 with an entrty stop. If your long against S! is successful, you can add to the position with a buy stop above the Pivot. Then, you can take partial profits with a limit at R2 and trail your protective stop on the remaining position for the ever elusive “Home Run” trade. The equations can be easily programmed into Excel and are often offered as canned indicators by most charting services. However, it’s good to know what they represent. H, L and C represent the previous day’s High, Low and Close, respectively. Here’s the equations:
R2 = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C) / 3
S1 = (P x 2) – H
S2 = P – (R1 – S1)
Often a large gap open leaves Pivot numbers calculated on the previous day’s actions fairly useless.
Many traders adjust their value for P as follows:
O = Today’s Opening Price
P = O + (H + L + C) / 4
Here’s an example in the December Fx EuroCurrency using data from 11/18/04 to project Pivot values for 11/19/04: