Pivot Points Basics

This strategy is almost entirely based on Pivot Points, but not the traditional ones. The most common formula for calculating pivot points is this:

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)

As you can see, this formula gives you back 5 different levels:

Resistance 2 (R2)

Resistance 1 (R1)

The Pivot (P)

Support 1 (S1)

Support 2 (S2)

chart from http://www.netdania.com/

What you do is take the “High”, “Low” and “close” prices from the previous session and what you get is a

series of 5 different levels that will give you some idea about what will be the range where price is going to

move during the coming session. The “session” can be 1 day, 1 week, 1 month, 4 hours, 8 hours….whatever

you want it to be. So lets say we are day traders and we want to know what are the pivot points for today, what we have to do is to look at the chart from Yesterday and see what was the High, Low and Close and then calculate the pivots using the simple formula explained below. Here’s an example looking at the chart above.

We take a chart from the past session, we want to know the pivot points for this coming day (the coming 24

hours), so what we have to do first is to look at the chart from the past 24 hours. Above, we have a 30 minutes chart for EUR/USD. I have already marked the High(1.1996), Low(1.1839) and Close(1.1871).

We are going to take this data and calculate the pivot points for the next session. First, we calculate the Pivot:

P= (H+L+C)/3 P= (1.1996+1.1839+1.1871)/3 P= 1.1902

It’s very simple math, now that we have the pivot point value we can calculate the support and resistance levels:

R2=1.2059

R1=1.1965

P= 1.1902

S1=1.1808

S2=1.1745

chart from http://www.netdania.com/

Now, above we have the chart for the session we calculated the pivot points for. As you can see, on this

particular case price only touched two levels, the pivot and support 1. I am not going to get into the whole

explanation about how price acts on the different support and resistance levels, first because it would take too

long and second because it’s not necessary. This is just an introduction to pivot points for those who have no

idea of what they are.

So, you take the previous session data, you make a few numbers and you got the 5 levels pivot points for the

next session. Now, this is not the only formula for calculating pivot points and it is not the formula we are going to use (even we are not going to use the formula I’ve been explaining during these 2 pages, I thought it was important for you to know it).