Pivot Points

Pivot point analysis was originally developed by Henry Chase in the 1930’s. It was Larry Williams who was credited with popularizing the usage of pivot points analysis in his book “How I made one million  dollars....Last year...Trading Commodities.”

Pivot point are mathematical formula designed to determine the next time period’s range based on the previous period’s data such as the high (H), the low (L) and the close (C).

The Pivot point is Pp=(H+L+C)/3

Resistance2  is R2=Pp + H – L

Reistance1 is R1= (Pp x 2 ) – L

Support1  S1= (Pp X 2 ) - H

Support2  S2= Pp – H + L

The third level of pivot calculation will be

R3= H + 2(Pp – L )

S3= L – 2(H – Pp)

Those numbers represent how price action reacts with those projected target levels, how the numbers would break down by order, what typically occurs and how the market behave at those levels.

1. Resistance 3-This extreme bullish market condition generally created by news-driven price shocks.
2. Resistance 2-This is the bullish market price target. It generally is the high of the day.
3. Resistance 1-This mild bullish to bearish high target number. In light session such as consolidation phase this will be the highest level for the day. In the bearish market condition, price will come to this level but mostly will fall.
4. Pivot Point-This is the focus price level or the mean. It is the strongest support and resistance level. Prices normally trade above or below this number before breaking in one direction. As a guide, if price opens above pivot point, buy on the dips. If market open below this number sell on rallies.
5. Support 1-The mild to bearish number. The low target number during low volatility day or consolidation phase. Prices tend to reverse at or near the number in bullish market and most time fall short of hitting this number.
6. Support 2-The bearish target low for the day. Market often show significant support at this level in bearish market sentiment. Level to cover shorts.
7. Support 3-An extreme bearish level. At this level, prices is news driven. An oversold condition and possibility of quick price reversal scalp trade.

 Since there is no formal closing and opening range in forex, most traders prefer to use New York Bank settlement as the close at 5 pm New York Time or GMT 21:00 and assign the next day’s session open at 5:01 pm.

Some traders used the midpoint number between the resistance, supports and pivot point. The present of 13 price points to monitor is quite a hassle for some traders. Normally I just concentrate on the pivot point, resistance and supports only.

Weekly and monthly calculations should also be included in pivot analysis. For the weekly calculation I base it from the open on Monday morning and the close on Saturday morning (Malaysian time) or 22:00 GMT(Sunday) to 22:00 GMT Friday.

The monthly calculations will take the opening of the first day of the month and the close from the last day of the month.

Filtering the numbers

1.      1. Initially I take R1 and S1 for analysis

2.      2. The pivot point (Pp) can be considered as the high and low for the day

3.     3.  In bear market when the highs should be lower and the lower should be lower, I used Pp up to R1 for resistance and S2 for support target.

4.     4.  In a bull market, the highs should be higher and the low is higher, I used S1 up to Pp and R2 for resistance and support target.

5.      5. Pivot point helps determine when to enter/exit position.

6.      6. Pivot point is used to project support and resistance or actual highs and lows of trading position.

7.      7. Pivot point compliment other technical indicators in conforming support and resistance S/R

Note: watch out for prior time period that have small range i,e narrow price range of high to low. This session will project smaller range for support and resistance numbers for next time frame. Be aware of easily breaking out of the narrow range pivot points numbers. In this situation it is better off to monitor the next higher time frame numbers such as weekly and monthly. This is also true if the previous session has unusual wide range. In this situation watch the market contained between R1 and S1.

There is another method to determine the next day or period price range using pivot points:

1. Bearish for next day-The market is considered bearish next day if today close is below the open i.e black candlestick, yesterday  close and today pivot point. In this case I would take tomorrow pivot point up to R1 for target high and S2 for target low.

2. Bullish for next day-For bullish sentiment, today market close should be above the open- white candlestick, yesterday close and pivot point. Than I would consider, the next day trading range from  pivot point or S1 up to a high of R2.