Tuesday, August 4, 2009

Pivot Points Simplified

Pivot Points are price levels that are based on the previous day’s opening, high and low prices.
Traders look at pivot points as they set a 'structural tone' for how the day may perform - as prices rise, these 'pivot prices' can indicate levels of support and resistance, and may be anchor points where traders may decide whether the session will be trending or range bound.

The calculations are quite simple -

How to Calculate Pivot Points
(http://www.investopedia.com/articles/technical/04/041404.asp)

There are several different methods for calculating pivot points, the most common of which is the five-point system. This system uses the previous day's high, low and close, along with two support levels and two resistance levels (totaling five price points) to derive a pivot point. The equations are as follows:
R2 = P + (H - L) = P + (R1 - S1)
R1 = (P x 2) - L
P = (H + L + C) / 3
S1 = (P x 2) - H
S2 = P - (H - L) = P - (R1 - S1)


Now the next question is do you use the previous day's Prices, or do you use overnight prices?
As an active trader looking for what works in the current market climate, I've noticed that the overnight price ranges are more appropriate inputs for finding pivot levels.

In the asx200 CFD 5 minute chart below we can see that the early morning upswing hits the R1 4326 level quite rapidly but the longer is stalls, the more likely the trend won't continue and we see that the bearish patterns and the moving averages lead to the prices retracing back to the Pivot Price of 4281 as the market closes.



Pivot Levels are the price areas that you need to pay attention to as they can indicate inflection points - and these are good areas of entry and exit if you can combine them with different areas of confluence based on other technical indicators.