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Daily Pivot Points

Daily Pivot Points

This lesson will cover the following

  • Definition
  • Calculation
  • Interpretation

Pivot points are essential support and resistance zones derived from the previous days high, low and close value. By incorporating these values in a series of simple calculations, you can determine the current days central pivot point, which acts as a major support/resistance line, and then estimate three other support and resistance levels which are positioned above and below the central one.

We have already spoken about the pivot points general specifications in our article “Pivot Points” so here we will skip some of the basics.

Because pivot points are used not only for day trading, but also for swing and position trading, the huge number of people who rely on the signals they generate further boost their significance. A day trader will use daily pivot points to determine the prices key points of interest for the current day (although pivot points are not the only major support/resistance areas). Meanwhile, a swing trader will use the previous weeks high, low and close to determine this weeks weekly pivot points, while a position trader will do the same but on a monthly basis.

Widely respected

Star-full-iconThe more popular a pattern is (or in our case a support/resistance level), the more people will respect it and act accordingly, thus increasing the chance of it successfully playing its role. For example, if a trader is aware that the central pivot point for the day runs at EUR/USD 1.3425 and the price is currently above that level but is edging lower, given that there are no other major factors at play, he will most likely respect it and refrain from entering short at or little above that level because he knows that the price is much more likely to rebound and edge back higher.

As weve said in our previous article dedicated to pivot points, there is a central pivot point (also known as the mid-pivot point), which is the base of calculation for three other sets of support/resistance levels – known as R1 and S1, R2 and S2, and R3 and S3. There are several different ways of calculating pivot points, namely the Standard Pivot Point Calculation, the DeMark Pivot Point Calculation, the Floor Pivot Point Calculation, the Woodie Pivot Point Calculation, the Camarilla Pivot Point Calculation and the Fibonacci Ratios Calculation. We will turn our attention toward the standard way for now. Check out how its done below:

Pivot Point for Current Day = [High (previous day) + Low (previous day) + Close (previous day)] / 3

Resistance 1 (R1) = 2 x Pivot Point – Low (previous day)
Support 1 (S1) = 2 x Pivot Point – High (previous day)

Resistance 2 (R2) = Pivot Point + [High(previous day) – Low(previous day)]
Support 2 (S2) = Pivot Point – [High(previous day) – Low(previous day)]

Resistance 3 (R3) = High(previous day) + 2 x [Pivot Point – Low(previous day)]
Support 3 (S3) = Low(previous day) – 2 x [High(previous day) – Pivot Point)]

As we said earlier, the mid-pivot point is the most important one and the rest revolve around it, thus it is the most robust support/resistance level. It sets the general tone for price action during that day – if the price is above the mid-pivot point, sentiment is generally bullish, and vice versa. The next three sets of support and resistance levels (R1, S1, R2, S2, R3 and S3) are typically easier to penetrate.

Additional pivot levels

additional-pivot-levelsHowever, these are not the only pivot points that traders tend to take into consideration. There are also the so-called mid-pivot points. They are placed exactly in the middle between each two pivot levels. Thus their calculation looks as follows:

M1 = (S3 + S2) / 2
M2= (S2 + S1) / 2
M3 = (S1 + PP) / 2
M4 = (R1 + PP) / 2
M5 = (R2 + R1) / 2
M6 = (R3 + R2) / 2

Keep in mind that different markets have different closing times, thus you need to adjust your calculations accordingly. For example, the US stock market closes doors at a different time from the European one, and so do the Asian markets.

Unlike them, the Forex market works around the clock and only closes during the weekend. Due to the decentralization, traders tend to use different closing prices for daily pivot point calculation – some use the closing price for a certain session, but the most popular ones are the 16:00 EST New York bank settlements close or 23:59 GMT.