Day trading using a pivot point calculator: what is it?

Any point that sees a shift in the market trend is a pivot point. The numbers that represent these pivot points are called points of support (if they under the trend line) and resistance (if above the trend line). The numbers are key markers in the market, because one says the market is bullish if the trend line is above the pivot point and bearish if it is below.

Experienced traders look at pivot points for indications of price movement and possible price reversals. The result of pivot point analysis gives you a leading — rather than a lagging — indicator of price movement. It therefore gives you in advance an idea of target levels which can often be identical to the actual highs or lows, or even both, during a given trading session.

Calculating the pivot point

The pivot point number is computed by adding up the high, low, and closing prices of the previous day and dividing the sum by three or P = (H + L + C)/3 where P=the pivot point, H=high, L=low, and C=close. This average becomes the basis for the other calculations in the pivot point analysis.

You typically need to calculate two levels each of support (S1 and S2) and resistance (R1 and R2) points. To compute for the first resistance point, R1, multiply P by 2 and subtract L — thus (P x 2) minus L. The second resistance point, R2, is equal to (P plus H) minus L.

To find the first support point, S1, multiply P by 2 and subtract H — thus (P x 2) minus H. The second support point, S2, is equal to (P minus H) plus L.

Essentially then, your pivot point analysis requires the calculation of five points. This can be applied on a daily basis and also to the figures for the week.

What the pivot point means

The Pivot Point number is viewed as the equilibrium price, because the experience suggests that price movements often revolve around the pivot. When traders talk of range-bound days, they are referring to expectations that the price of the share will fluctuate between the first points, R1 and S1. When the actual price breaches either one of these points, then the second points, R2 and S2, are then considered.

When you are trying to determine your entry and exit points, the pivot points considered along with charts, candlesticks and other indicators can be useful. Some traders think it is best to buy a share above the pivot point and never below. The experience is — and many studies support this conclusion — that running contrary to the pivot is the fatal flaw in 7 of 10 investment errors.

On the other hand, you may have noticed that many trading days are range-bound, i.e. moving within the R1/S1 range. For this reason, some other expert traders think it is better to buy into a share at support and to sell at resistance.

As you gain more experience in day trading, you will be able to set your own stops. And by the way, pivot points are equally useful whether you are in shares, forex, metals and other investments.

To get your free pivot point calculator, click here.