Build a better understanding of technical analysis with pivot points support and resistance formulas


Before we dive into calculating support and resistance levels, we need to start with understanding pivot points.


Imagine a pivot point as a central gravitational point. If the prices are below the pivot point, the trader can expect the price to rise. If the price is above the pivot point the trader can expect the price to fall. This gives the trader the first indication into a buy or sell signal for that day as part of a wider range of technical analysis.


Why are Pivot Points used by day traders?


A lot of day traders prefer to use pivot points to help identify potential support and resistance price levels, especially when it comes to trading currencies and commodities.


They are calculated based on the previous day’s high, low, and closing prices. Because they are based on objectivity rather than subjectively viewing a chart, they are undeniably a strong predictor of price ranges for the day.


The formula to calculate a pivot point is simple and can be put into a spreadsheet to determine daily price ranges.


Pivot Point Calculation Formula


Pivot = (High + Low + Close)/3


Pivot Point Calculation Example using USD/JPY Currency


HIGH+LOW+CLOSE/ 3 =

H 145.44 + L 144.73 + C145.32 = 435.49

435.49 / 3 = 145.163333

PIVOT POINT = 145.16


How can you use Pivot Points as part of your daily technical analysis?


At the start of each of your trading day simply calculate the pivot points of the currencies or commodities you are interested in trading.


You can easily do this by inputting the numbers and the formula above into a simple Excel spreadsheet.


Now you are ready to use the pivot point to calculate the day’s support and resistance levels.


The support and resistance levels are identified based on the difference between the previous day’s high and low prices and the pivot point.


The way to trade with support and resistance levels is also simple. A price approaching a support may give us an opportunity to buy, while a price approaching a resistance level may give us an opportunity to sell.


First Level Pivot Points Calculation Formula

First resistance = (2x Pivot Point)-Low

First support = (2 x Pivot Point) – High


Second Level Pivot Points Calculation Formula

Second resistance = Pivot Point + (High – Low)

Second support = Pivot Point – (High-Low)


Third Level Pivot Points Calculation Formula

Third resistance = High + 2(Pivot Point – Low)

Third support = Low – 2(High-Pivot Point)


Calculating the support and resistance levels


Before we can carry on with the calculation, we need to identify the previous day’s high and low.


The easiest way to do this calculation is to open a chart on any trading platform. I am using investing.com. Set the chart to your currency pair, e.g., USD/JPY and format the chart to candlestick, and day timeframe.


Then simply hover over the previous day candle and the data will appear in the top left side of the chart.



Chart 1 Source: Investing.com Previous Day Data from 07 October 2022, 1D timeframe, USD/JPY


You can see the following data from the chart.


CURRENCY USD/JPY OPEN 145.13 HIGH 145.46 LOW 144.71 CLOSE 145.33

Let us take our USD/JPY currency example that we used above. We calculated the pivot point as 145.16.


First resistance Formula = (2x Pivot Point)-Low

2 x 145.16 = 290.32 – 144.71 = 145.61


First Resistance is 145.61


First support formula = (2 x Pivot Point) – High

2 x 145.16 = 290.32 – 145.46 = 144.86


First Support is 144.86.


Let’s complete the second and third support and resistance levels.


Second Level Pivot Points Calculation Formula


Second resistance = Pivot Point + (High – Low)

145.16 + (145.46 – 144.71)

145.46-144.71 = 0.75

145.16+0.75 = 145.91


Second resistance level = 145.91


Second support = Pivot Point – (High-Low)

145.16 – (145.46-144.71)

145.46-144.71 = 0.75

145.16-0.75 = 144.41


Second Support = 144.41


Third Level Pivot Points Calculation Formula


Third resistance = High + 2(Pivot Point – Low)

145.46 + 2 x (145.16 – 144.71)

145.16-144.71 = 0.45

2x 0.45 =0.9

145.46+0.9 = 146.36


Third resistance = 146.36


Third support = Low – 2(High-Pivot Point)

144.71 – 2 x (145.46 – 145.16)

145.46-145.16 = 0.3

2 x 0.3 =0.6

144.71 – 0.6 =144.11


Third support = 144.11


We now have our trading ranges as follows for the day.

Pivot: 145.16

1st

2nd

3rd

Resistance

145.61

145.91

146.36

Support

144.86

144.41

144.11

Table 1 Support and Resistance levels for USD/JPY 10 October 2022


Day Trading with Pivot Points and Support and Resistance


As mentioned earlier pivot points act as a gravitational pull or push for the price range. The closer the price is to the pivot point, in general, the higher the volume of trading occurs.


How you can use pivot points as trading strategies


Pivot Point Bounces

If the price action hesitates and bounces back before reaching the pivot point level, you can enter the trade in the direction of the bounce. If you are testing the trade with the price above the pivot point and the price moves close to the pivot point line and bounces back to the upside you can enter a buy trade.


Alternatively, if you are testing a pivot line from the lower side and the price bounces back to the downside after hitting the pivot, you should sell short.


Pivot Point Breakout

When the price action breaks through the pivot line – such as crossing from below it to above it – the trade should continue in the direction of the breakout. If the breakout is bearish, the trade should be short, while for a bullish breakout the trade should be long.


Why Day traders like to use Pivot Points and Support and Resistance Levels


High Accuracy

The pivot point is considered one of the most accurate indicators in the market. This explains why most day traders use it to determine entry and exit points.


Short Time Frames

As it uses data from the previous day its easy to see short term trend lines and although its primarily used for a daily time frame, it can also be used from much shorter time frames such as hourly or 15-minute charts.