Calculating Pivot Points: A Step-by-Step Guide for Traders
Pivot points represent key price levels for a given currency pair. The main pivot point (base) is the average of the last high, low, and close price. This value will act as support or resistance (S/R) in the future. If the pivot point is below current prices, it will provide support. If it is above the current quotes, it will provide resistance.
Pivot Point Formula:
PP = \frac{H + L + C}{3}
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Where:
- PP: Pivot Point
- H: High Price
- L: Low Price
- C: Close Price
Levels of Resistance and Support
Additional levels of resistance and support can be determined from the main pivot point. For this purpose, the following formula is used:
- R1 = (P × 2) − Low
- R2 = P + (High − Low)
- S1 = (P × 2) − High
- S2 = P − (High − Low)
Where:
- P: Pivot Point
- R1: Resistance 1
- R2: Resistance 2
- S1: Support 1
- S2: Support 2
Example Calculation
If, on a given day, the high, low, and closing prices were 1.11, 1.09, and 1.10, we would get the following P, R1, R2, S1, S2:
- P: 1.10 = (1.11+1.09+1.10) / 3
- R1: 1.11 = (1.10*2) – 1.09
- R2: 1.12 = 1.10 + (1.11-1.09)
- S1: 1.09 = (1.10*2) – 1.11
- S2: 1.08 = 1.10 – (1.11-1.09)
| P | R1 | R2 | S1 | S2 |
| 1.10 | 1.11 | 1.12 | 1.09 | 1.08 |
How to Apply Pivot Points to Trading
The market is defined as bullish when prices are above the pivot point. Conversely, it is bearish when prices are below the pivot point.
Accordingly, prices can test the first resistance (R1) in a bull market. The eventual overcoming of R1 would turn it into future support, with R2 being the next target for the bulls. In a bear market, overcoming the first support (S1) would turn it into future resistance. S2 will be the next bear market target.
Chart 1: Pivot Points Supports/Resistances. Source: MetaTrader4
In Chart 1, the high, low, and closing prices of Week 1 have defined the base pivot point and, hence, the S/R levels that will be in play during Week 2. Throughout Week 2, S1 was tested several times unsuccessfully. The subsequent upward movement broke the pivot point and attempted to overcome R1. The resistance has held.
The break of each S/R level opens a space for movement to the next S/R.
In the example, weekly data is viewed on a one-hour chart. Traders often calculate pivot points based on different time frames (daily, hourly). Thus, they fix different critical levels for optimal position management.
Pivot points are most commonly used in intraday trading. Their significance diminishes over time as other market factors come into play.
The presence of support and resistance could contain all the information needed for a trading strategy. Different entry points for opening positions and placing stop-loss and take-profit orders will be available. This is precisely one of the main advantages of pivot points – they are mathematical equations that provide consistency in defining critical price levels.
Shortcomings of PP
The PP formula reveals the method’s main shortcomings. It uses data from previous periods to define the market as bullish or bearish. In the meantime, market drivers might have changed.
Like most technical tools, PP should be combined with other analytical techniques.
Conclusion
Pivot points should be used with an appropriate degree of criticality. Their most significant advantage is their objectivity in determining. They are most effective in the short term.
