Pivot Point Analysis is a price forecasting method that is very popular among professional day traders. There are some other terms, such as price range forecasting or pin-pointing tops and bottoms, that used to refer to the numbers derived by pivot points.
The Pivot Point Analysis is considered as a leading indicator rather than a lagging indicator since it provides the early advanced target levels for traders. Traders could use the pivot point numbers from previous session to identify the support and resistance levels in the next trading session.
Pivot Point Formula
There are different variations in calculation of pivot points, but let us start with the most traditional way.
A pivot point number is the average of high, low and close prices in a trading session (one bar of price chart) as the following formula.
Pivot Point = (High + Low + Close) / 3
The first resistance level is gotten by taking the pivot point number times two and subtracts the low.
1st Resistance Level = (Pivot Point x 2) – Low
And the second resistance level is gotten by adding the high to the pivot point number then subtracting the low.
2nd Resistance Level = (Pivot Point + High) – Low
As for the first support level, it is gotten by taking the pivot point number times two and subtracts the high.
1st Support Level = (Pivot Point x 2) – High
And the second support level is gotten by subtracting the high to the pivot point number then adding the low.
2nd Support Level = (Pivot Point – High) + Low
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