CLASSIC TECHNIQUES
Pivot Points
by Jayanthi Gopalakrishnan
Classic techniques still work on charts at all time levels, and the most basic charting technique is the identification and development of pivot points. Take a look.
Cut your losses, ride your profits! That adage should be familiar to all traders, and it may buzz through their minds as something taken for granted but not easy to implement. The pivot point technique can help you do both. Floor traders use pivot points to determine critical price and support/resistance levels. It is a relatively simple calculation that can be jotted on the back of a trading card for easy reference. Off-floor traders who have the luxury of looking at monitors with real-time datafeeds can adopt this technique as well.
FIGURE 1: PIVOT POINT CALCULATIONS. Different methods are used to calculate the pivot point. Here, you see the results of the traditional method and two variations of it.
CALCULATION
A pivot point is the price at which the direction of price movement changes. It is calculated using data from the previous trading day. By looking at the high, low, and close, you can calculate the next day's pivot point as well as support and resistance levels.
Many variations exist for calculating the pivot point and its related support and resistance levels. Here are a few:
Traditional method
Pivot point = (H + L + C)/3
First support = (2 * Pivot) - H
First resistance = (2 * Pivot) - L
Second support = Pivot - (H - L)
Second resistance = Pivot + (H - L)
Variation 1
One variation involves adding the trading day's open and calculating the average of the four values. This takes into account any opening gaps and also accounts for overnight or extended-hours trading. The formula changes to:
Pivot point = (Hyesterday + Lyesterday + Cyesterday + Otoday)/4
The support and resistance calculations remain the same.
Jayanthi Gopalakrishnan is a Staff Writer for STOCKS & COMMODITIES.
Excerpted from an article originally published in the February 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.
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