PIVOT POINT, SUPPORT AND RESISTANCE

How to Calculate Pivot Points

 

The first thing we are going to learn is how to calculate pivot point levels.

The pivot point and associated support and resistance levels are calculated by using the last trading session's open, high, low, and close. (Since Forex is a 24-hour market, most traders use the New York closing time of 4:00pm EST as the previous day's close)

The calculation for a pivot point is shown below:

Pivot point (PP) = (High + Low + Close) / 3

Support and resistance levels are then calculated from the Pivot Point using the formula as follows

First level support and resistance:


First resistance (R1) = (2 x PP) - Low

First support (S1) = (2 x PP) - High

Second level of support and resistance:

Second resistance (R2) = PP + (High - Low)

Second support (S2) = PP - (High - Low)

Third level of support and resistance:

Third resistance (R3) = High + 2(PP - Low)

Third support (S3) = Low - 2(High - PP)

Keep in mind that some charting software plot intermediate levels or mid-point levels. These are basically mini levels between the main pivot point and support and resistance levels.

 

Other Pivot Point Calculation Methods

 

While I suggest that you stick to the standard method of calculating pivot points, you should know that there are other ways to calculate for pivot points. In this lesson,  will talk about these other methods, as well as give you the formulas on how to calculate for these levels.

Woodie Pivot Point

R4 = R3+ (High - Low)

R3 = H + R1

R2 = PP + (High - Low)

R1 = 2 PP - Low

PP = (H + L + 2C) / 4

S1 = 2PP - High 

S2 =PP - (High - Low)

S3 = Low - S1

S4 = S3 - (High - Low)

C- Closing Price, H - High, L - Low

In the formulas above, you'll notice that the pivot point calculation is very different from the standard method.
Also, in order to calculate for the corresponding support and resistance levels, we would use the difference between the previous day's high and low, otherwise known as the range. 

Camarilla Pivot Point 

 

The Camarilla formulas are similar to the Woodie formula. They also use the previous day's close and range to calculate the support and resistance levels. The only difference is that we should calculate for 8 major levels (4 resistance and 4 support), and each of these levels should be multiplied by a multiplier.

R4 = C + ((H-L) x 1.5000)

R3 = C + ((H-L) x 1.2500)

R2 = C + ((H-L) x 1.1666)

R1 = C + ((H-L) x 1.0833)

PP = (H + L + C) / 3

S1 = C - ((H-L) x 1.0833)

S2 = C - ((H-L) x 1.1666)

S3 = C - ((H-L) x 1.2500)

S4 = C - ((H-L) x 1.5000)

C - Closing Price, H - High, L - Low


The main concept of Camarilla pivot points is that it is based on the idea that price has a natural tendency to revert back to the mean (sound familiar?), or in this case, the previous day's close.
The idea is that you should buy or sell when price reaches either the third support or resistance level. However, if price were to burst through S4 or R4, it would mean that the intraday trend is strong, and it's about time you jump on that bandwagon!

Fibonacci Pivot Point 

 

Fibonacci pivot point levels are determined by first calculating the pivot point like you would the standard method.Next, multiply the previous day's range with its corresponding Fibonacci level. Most traders use the 38.2%, 61.8% and 100% retracements in their calculations. Finally, add or subtract the figures you get to the pivot point and voila, you've got your Fibonacci pivot point levels!

R3 = PP + ((High - Low) x 1.000)

R2 = PP + ((High - Low) x .618)

R1 = PP + ((High - Low) x .382)

PP = (H + L + C) / 3

S1 = PP - ((High - Low) x .382)

S2 = PP - ((High - Low) x .618)

S3 = PP - ((High - Low) x 1.000)

C - Closing Price, H - High, L - Low

The logic behind this is that many traders like using the Fibonacci ratios. People use it for retracement levels, moving averages, etc. Why not use it for pivot points as well?
Remember that both Fibonacci and pivot points levels are used to find support and resistance. With so many traders looking at these levels, they can actually become self-fulfilling.

Which method is best?

The truth is, just like all the variations of all the other indicators, there is no single best method. It really all depends on how you combine your knowledge of pivot points with all the other tools in your trading toolbox.
Just know that most charting software that do automatic calculations normally use the standard method in calculating for the pivot point levels.
But now that you know how to calculate for these levels on your own, you can give them all a swing and see which one works best for you.