A pivot point is the price at which the direction of price movement changes. It is calculated using data from the previous trading day. By looking at the high, low, and close, you can calculate the next day’s pivot point as well as support and resistance levels.
Many variations exist for calculating the pivot point and its related support and resistance levels.
Here are a few:
- Pivot point = (H + L + C)/3
- First support = (2 * Pivot) – H
- First resistance = (2 * Pivot) – L
- Second support = Pivot – (H – L)
- Second resistance = Pivot + (H – L)
One variation involves adding the trading day’s open and calculating the average of the four values. This takes into account any opening gaps and also accounts for overnight or extended-hours trading.
The formula changes to:
Pivot point = (H yesterday + L yesterday + C yesterday + O today)/4
Another variation of the calculation is to substitute yesterday’s close with today’s open(see also how to trade with pivot points). This also accommodates opening gaps and extended-hours trading.
The calculation changes to:
Pivot point = (H yesterday + L yesterday + O today)/3