Pivot points are a critical part of the trading strategy of anyone who does this type of work for more than a short period of time. They will quickly realize that they need to work with pivot points because they need to know what to base their assumptions about the movements of the markets off of. In other words, they will need to make sure they have some frame of reference from which to place a trade. It could be the case that they want to place either a buy or a sell order, but the most important thing is that they know where those pivot points are so that they can plan their trades around them.
How Are Pivot Points Calculated?
Pivot points are calculated by taking the previous session’s open, close, high, and low points. This is a little confusing for some people because they know that the market is a 24-hour market, and they aren’t sure when the previous session even is (by definition). Fortunately, the universal way that this is determined is by using the closing price from the New York session at 5PM New York time.
This frame of reference is used by traders around the world, and it is helpful for them to see how their trades interact with the market based on a specific time frame that they can use and get benefits from.
If you’re interested in the math of pivot points, here you go:
The calculation for a pivot point is:
Pivot point (PP) = (High + Low + Close) / 3
Support & Resistance
Support and resistance levels are then calculated off the pivot point:
First level support and resistance:
First resistance (R1) = (2 x PP) – Low
First support (S1) = (2 x PP) – High
Second level of support and resistance:
Second resistance (R2) = PP + (High – Low)
Second support (S2) = PP – (High – Low)
Third level of support and resistance:
Third resistance (R3) = High + 2(PP – Low)
Third support (S3) = Low – 2(High – PP)
Just know that some charting software plots intermediate levels or mid-point levels. Either way, most charting software automatically calculates these levels for you.
Can You Use Pivot Points to Trade in Either Direction?
Yes, you can use pivot points no matter if you intend to trade in a bullish or a bearish direction. In fact, you should be using them in both directions because you do not want to miss out on potential opportunities to make money from your trades.