Pivot points are also widely used by professional traders to find safe places at which to buy and sell from.
Pivot points are calculated using data from the previous period, so for example if you are calculating pivot points for the next day you would use the data from the previous day to get your levels.
There are a few different ways to calculate them but one of the most popular ways is to use the highest price, the lowest price, and the closing price of the previous day.
They are calculated as follows:
Main central Pivot point (PP) = (High + Low + Close) / 3
Support and resistance levels are then calculated off the pivot point like so:
First level of support and resistance:
First support (S1) = (2*PP) – High
First resistance (R1) = (2*PP) – Low
Second level of support and resistance:
Second support (S2) = PP – (High – Low)
Second resistance (R2) = PP + (High – Low)
You can see above that the calculations are pretty simple, but in any case most charting packages will have a facility where this is done automatically for you and the pivot points are just plotted onto your chart automatically.
Here’s an example chart:
Another interesting feature of pivot points is that they create zones.
This is particularly true of daily pivots and the concept works something like this:
The area from the Main central pivot point up to the R3 resistance level is known as a selling zone, and the area from the main central pivot point down to the S3 Support level is known as a buying zone.
So each day you have an indication of the kind of areas where you want to be buying or selling, which can take much of the Confusion out of trading.
Next: Multiple Timeframes