Using Pivot Points & How to Calculate Them
Pivot Points are horizontal support and resistance lines placed on a price chart for the ease of calculating and plotting charts. There are certain platforms that support Pivot Points, but in case you are using a platform that doesn’t support it, you can manually calculate and plot them on the charts.
How to calculate pivot points
Pivot Levels are calculated using three types of information from the previous trading day: High Price, Low Price and Close Price. While there are several methods for calculating pivot points, the most common one is the five-point system. This system uses the previous day's high, low and close prices, alongside support and resistance levels, making it a total of five points, to derive a pivot point. Here are the equations:
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)
H = High Price
L = Low Price
C = Close Price
S1 = Support 1 – which is (Pivot Point x 2) – Yesterday High
S2 = Support 2 – which is Pivot Point – (Yesterday High – Yesterday Low)
R1 = Resistance 1 – which is (Pivot Point x 2) – Yesterday Low
R2 = Resistance 2 – which is Pivot Point + (Yesterday High – Yesterday Low)
P = Pivot point – which is (Yesterday High + Yesterday Close + Yesterday Low)/3
Pivot Point, R1 and S1 are the most important Pivot Levels, but we can also calculate the R2 and S2. Hence, we will have 5 horizontal lines on our chart: R1, R2, Pivot Point, S1 & S2
How to Plot Pivot Points
The high, low and close prices for each day in a 24-hour market like the forex market is calculated using prices of the previous day, which is done by checking that day’s candlestick. This is typically based on the New York closing time on a 24-hour cycle; after which the next candlestick opens.
Therefore, if you want to trade, for example, on November 28, you need to check the candlestick of November 27 and find the high, low and close prices. You may also plot the Pivot Points on smaller time spans, for instance, one hour or five minutes charts. Pivot Levels tell you when and how the price will reverse and change course.
The next example is a five minutes chart where the Pivot Levels are calculated and plotted, where the high, low and close price for November 27 are consulted to plot the pivot levels. So, the high, low and close prices for November 28 would be:
High = 1.4787
Low = 1.4737
Close = 1.4787
Here is the calculated Pivot Points according to the above formulae:
R2 = 1.4820
R1 = 1.4804
Pivot Point = 1.4770
S1 = 1.4754
S2 = 1.4720
However, like any other indicator, Pivot Points do not guarantee 100% accuracy and sometimes might not work at all. But as explained earlier, it is good to have them on your charts even if your trading system is not based on Pivot Points. These are the levels that the price may react to during the day.