Like indicators, there’s a whole load of pivot point calculators with names attached.

A pivot point is nothing without its levels of support and resistance. The plan here is that by using the figures for the previous trading period, you have a chance of predicting future movements in terms of likely support and resistance.

You’re looking for likely entry and exit points based on the previous day’s activity. While range traders will identify levels of support or resistance and then make a trade accordingly, a breakout trader will use the same levels as a test of whether a true breakout is occurring.

The simple version would run like this:

First calculate the Pivot Point, P = (High + Low + Close) / 3

Then the levels of support and resistance:

First support: S1 = (2 x P) – High
First resistance: R1 = (2 x P) – Low
Second support: S2 = PP – (High – Low)
Second resistance: R2 = PP + (High – Low)

The different recipes here for calculating these levels is what accounts for the different brands of pivot point you’ll see offered or given away for free… There are Floor pivot points, De Mark’s pivot points and good many others

The idea of the pivot point is that it may act as support or resistance, depending on which way the price is coming at it, from above or below, causing the price to (repeatedly) reverse or pivot away – with the subsidiary levels of support/resistance acting to contain the price, hopefully a picture will be provided to explain and even predict future movement.

It’s obvious that whatever recipe is used to calculate pivot points, they are in the nature of a snapshot – redraw the time frame and you will get a different answer and a different suggested strategy.

There’s a few traders around who reckon pivot points are all you need for a successful career – most don’t. They’re just another way of working to make sense of what’s going – experience should start to tell you how much confidence you might want to place on their message…

Next, is 12. Chart Patterns →