Pivot Points

Pivot Points

A trader needs reference point to enter a trade, place stop loss level and profit taking level. There are a number of ways to derive such reference points. One method is to draw trend lines on charts to determine support and resistance level. Fibonacci theory is also another favourite way to check for potential support and resistance points. A more mathematical method is through pivot points.

Pivot points are calculated based on the following formulas:

Pivot point for current bar = [high(previous)+low(previous)+close(previous)]/3

From the pivot point, you can derive 3 support and 3 resistance levels

Resistance 1 = (2*pivot point) – low(previous period)

Support 1 = (2*pivot point) – high(previous period)

Resistance 2 = (pivot point – support 1) + resistance 1

Support 2 = pivot point – (resistance 1 – support 1)

Resistance 3 = (pivot point – support 2) + resistance 2

Support 3 = pivot point – (resistance 2 – support 2)

Taking Dow Industrial Average as an example, the following statistics can be derived:

What we can see from the statistics is that price bar exceeds the R2 resistance around 13% of the time. How can a trader make use of this information? A trader that is holding a short position can choose to place the stop loss level at somewhere above the R2 level for a 13% probability that the stop loss is triggered. Such statistics can be valuable to a trader who needs to decide where to exit an opened position.