Pivot Points

Pivot Points are a well-known "secret" of floor traders. Most traders hear about support and resistance levels. But how do analysts and professional traders come up with these levels?

There are several different methods for calculating pivot points. The most common method is the five-point system. This system uses the previous day's high, low and close, along with two support levels and two resistance levels (totaling five price points) to derive a pivot point. Here is as example of a pivot point calculation formula:

R2 = P + (H - L) = P + (R1 - S1)
R1 = (P x 2) - L
P = (H + L + C) / 3
S1 = (P x 2) - H
S2 = P - (H - L) = P - (R1 - S1)

The "S" represents the support levels, "R" represents the resistance levels, and "P" represents the center pivot point. High, low and close are represented by the "H," "L" and "C."

Another common variation of the five-point system includes the opening price in the formula:
P = ((Today's O) + Yesterday's (H + L + C)) / 4. Here, the opening price, "O," is added to the equation.

Perhaps this sounds like a lot of work but make no mistake; the professionals look at pivot points and so should you.