In the previous lesson, we’ve touched the concept of pivot points calculation when we’re discussing the basic of pivot points. However, that’s just an introductory lesson.
In this lesson, you’ll dive deeper into the complete process of pivot points calculation. Mastering this process helps you predict the potential support and resistance level of the following trading day.
Lesson Overview
- Pivot points are useful because of the objectivity of the concerned data – the previous day’s high, low, close, support level, and resistance level.
- Pivot points determine the sentiment of the market.
- Each pivot point is calculated and plotted separately.
Pivot Points Refresher
A pivot point is a famous technique used to forecast prices by day traders, and considered essential knowledge from the “old school of trading.”
Pivot points show the market level between a series of support levels and resistance levels.
This level is a threshold; when the price trades above the pivot point level, it indicates a bullish sentiment. On the flip side, a bearish sentiment happens when the price trades below the pivot point level.
But how does the pivot point level form?
This intraday indicator calculates the average of the previous day’s closing price and its low and high.
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What do Pivot Points Tell Us?
The pivot point can be considered the average of a previous session’s trading range combined with the closing price.
This means that the support and resistance levels that we calculated tell us about the potential ranges for the next session time frame!
The range that you chose to calculate the pivot points can be an hour, a day, a week, or a month depending on your preference, but most trading software automatically displays these numbers on a daily basis.
Unlike moving averages or oscillators, pivot points remain the same throughout the.
For instance, if a price falls below the pivot point, a trader can short; on the other hand, if the price rises above the pivot point, they can go long.
Meanwhile, the support and resistance levels calculated based on the pivot points can be used as stop-loss levels.
The Five Key Data for Pivot Points Calculation
When you try to plot pivot points in the chart, you must look at these five market data. These data are from the previous trading day, thus the objectivity of this analysis.
High (H)
The high indicates the highest price from the previous trading day or previous session.
Low (L)
In contrast, the low is the lowest price from the previous trading session.
Close (C)
The close is the closing price from the day before!
Support Level (Sn)
The support level, also considered the “floor price” is the lower range of a market during a downtrend.
Resistance Level (Rn)
On the other hand, the resistance level is a price level during an uptrend, also considered the “ceiling price.”
Pivot Point Formula
The pivot point number is the sum of the high, low, and close divided by three. This is the foundation for other pivot point calculations.
Here’s the common mathematical formula for pivot point analysis: P = pivot point, C = close, H = high, and L = low.
P = (H + L + C) / 3
1st Resistance Level (R1)
To get the first resistance level (R1), take the pivot point number times two and then subtract the low.
R1 = (P x 2) − L
1st Support Level (S1)
For the first support level (S1), take the pivot point number times two and then subtract the high.
S1 = (P x 2) − H
2nd Resistance Level (R2)
To find the second resistance area (R2), add the high to the pivot point number and then subtract the low:
R2 = (P + H) − L
2nd Support Level (S2)
To get the second support area, subtract the high from the pivot point number and then add the low.
S2 = (P−H)+L
3rd Resistance Level (R3)
On the other hand, to get the third resistance level (R3), add the high to the pivot point subtracted by the low multiplied by two.
R3 = H + [2 (P − L)]
3rd Support Level (S3)
To get the third support level (S3), subtract the pivot from the high and multiply it by two, and then subtract it from the low.
S3 = L − [2 (H − P)]
Trading Pivot Points: Example
Let’s take a look at pivot points in action!
Below is a 60-minute price chart for EUR/GBP on January 9, 2025. Using the pivot point formula, we can calculate our target numbers for the next day (January 10) by using the data on January 9!
The candles show that the high was 0.83723, the low was 0.83636, and the close was 0.83720.
Calculating the numbers gives us the following figures:
| Data | Formula | Calculation |
| P = 0.83693 | P=(H+L+C) / 3 | P = (0.8372 + 0.83636 + 0.83720) / 3 |
| R1 = 0.8375 | R1 = (P x 2) − L | R1 = (0.83693 x 2) - 0.83636 |
| S1 = 0.83659 | S1 = (P x 2) − H | S1 = (0.83693 x 2) - 0.83723 |
| R2 = 0.83727 | R2 = (P + H) − L | R2 = (0.83693 + 0.83723) - 0.83636 |
| S2 = 0.83545 | S2 = (P−H)+L | S2 = (0.83693 - 0.83723) + 0.83636 |
| R3 = 0.83841 | R3 = H + [2 (P − L)] | R3 = 0.83723 + [2 (0.83693 - 0.83636)] |
| S3 = 0.83568 | S3 = L − [2 (H − P)] | R3 = 0.83723 - [2 (0.83693 + 0.83636)] |
The results tell us that we can set stop-loss at the support and resistance levels, while the pivot point can be used as reference for entry or exit points.
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