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CO16 - Know the 3 Other Types of Pivot Points

"Pivot points are simple price levels derived from the previous day or week’s price action. The pivot points act as reference points for the markets. There is a good chance that price will react to one of the pivot points. There is nothing mystical about pivot points. These are values that are mathematically derived based on key price points such as the open, high, low and close from the previous day. There are many different ways on how traders can use this information. This has led to creation of some various pivot point indicators. All of them basically work on the same bottom line concept of projecting price points based on previous day’s price behavior. The difference here is in the calculation of these price points. In this article, we take a look at three of the most commonly used pivot points. Remember that there is no pivot point calculation that can give an edge over the others. It is mostly a matter of personal preference on what pivot points a trader wants to use in their trading."

Pivot points, as we covered in the previous article are technical price levels. The price levels are derived from the previous day or the previous week or even the previous month’s price action.

Pivot points originally started off on a simplistic note. But given the fact that traders are always on the lookout to find an edge, there are many different ways a pivot point can be calculated.

In this article, we give you an outline to the three most commonly used pivot points. Bear in mind that the calculation for each of these pivot points are different, but they do not differ much from other methods.

At best these different types of pivot points only differ in where the price levels are plotted. The behavior of price, regardless of the pivot point being used does not change. All pivot points follow the same concept of a pivot or a mid-point which is then followed up by three levels of support and resistance.

Depending on what trading platform you use, you can also find support and resistance levels up to five degrees higher. But to keep pivot points simple, let’s look at the standard concept of one pivot point and three support and three resistance levels.

Traditional pivot points

Traditional pivot points were how they were basically started. In this approach, the calculation is quite simple. The traditional or the classic pivot point uses the following concept.

Pivot point = (High + Low + Close)/3 – This is nothing but the median price of the previous day plotted on the current day’s chart.

R1 = Pivot point * 2 – low – This means that the first resistance point is calculated by taking the day’s pivot point and multiplying it by two and then subtracting the previous day’s low.

R2 = Pivot + (High + Low) – As the formula suggests, the second level of resistance is calculated by taking the current day’s pivot point and adding it to the high and low price of the previous day.

R3 = Pivot point * 2 + (high – 2 * low) – The third resistance point is calculated by multiplying the pivot point by 2 and then adding the high of the previous day to the two times multiplying factor of the previous day’s low.

S1 = Pivot point * 2 – high – The first level of support is derived based on taking the pivot point value and multiplying it by two and then subtracting the previous day’s high.

S2 = Pivot – (high – low) – Similar to R2, in this case, the second level of support is derived by subtracting the pivot value from the difference between the high and the low from the previous day.

S3 = Pivot * 2 – (2 * high – low) – The third level of support is formed by multiplying the pivot level by two and then subtracting the different from the previous day’s high and low and multiplying the result by 2.

Fibonacci Pivot points

The Fibonacci pivot points, as the name indicates is derived by applying the Fibonacci method to the pivot points. In this case, the pivot point calculation remains the same. The only difference is in the calculation of the three support and resistance levels.

The levels are calculated by multiplying the values by the Fibonacci levels of 0.382 and 0.618.

You can already estimate that the change in the three support and resistance levels is only minor comparing to the first or the traditional method of calculating the pivot points.

Woodies Pivot points

The Woodies method of pivot pointes were based on the formula given by Woodie who is attributed to these pivot points. In this method, Woodies pivot points use the average price, which includes the open, high, low and close.

This is somewhat different compared to the median price which uses just the high low and close prices. The calculations for the three support and resistance levels of course differ slightly.

CO16 01 Types Pivot Points

Woodies and Fibonacci Pivot points example

 

Traders do not have to worry too much about the calculation methods. Even more is the fact that there is no proven studies that can ascertain that a particular calculation is more effective than the others.

Therefore, choosing one of the three pivot points is a matter of personal choice rather than gaining any big edge in the markets.

Besides the above three pivot points, you can also find other calculations called as the Camarilla pivot points and the Demark pivot points. As with most of the pivot points, it is only the calculation of the pivot points that differ.

Read 651 times Last modified on Monday, 08 July 2019 09:11

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