Pivot points are a common method utilised by traders to find the support and resistance price levels of an asset. These so called pivot points are found by a carrying out a simple calculation using the Open/High/Low and the Closing price of any particular asset from the previous days pricing. When a price hovers just below a calculated pivot point or pivot support/resistance and breaks up through the calculated pivot point it can be seen as a buy signal (or vice versa for a sell signal), or if the prices are above the calculated pivot point it is considered bullish and if they are below then bearish. Pivot points are commonly used in conjunction with other forms of technical analysis and are used as a reference point for an entry point for a trade.
How is the pivot point calculated?
There are many variations for calculating the pivot point and the associated support and resistance levels and many traders have tweaked an initial calculation to try and give them an edge.
The calculation is fairly simple but there are plenty of free pivot calculators available on the internet
Traditional calculation method
Pivot Point = (Previous High + Previous Low + Previous Close) / 3
The pivot point can then be used to determine the levels of estimated support and resistance levels for the day:
Resistance Level 1 = (2 * Pivot Point) – Previous Low
Support Level 1 = (2 * Pivot Point) – Previous High
Resistance Level 2 = (Pivot Point – Support Level 1) + Resistance Level 1
Support Level 2 = Pivot Point – (Resistance Level 1 – Support Level 1)
Resistance Level 3 = (Pivot Point – Support Level 2) + Resistance Level 2
Support Level 3 = Pivot Point – (Resistance Level 2 – Support Level 2)
You can view the below video from Erich Senft to learn how support and resistance levels can be used in your trading strategy.