Daily pivots are calculated from the prior day’s high (H), low (L) and closing (C) prices by a simple formula, such as (H + L + C) / 3. Typically two levels of support (S1, S2) and resistance (R1, R2) are also calculated around the pivot price. The first support is usually calculated as 2 * P – H and the first resistance is usually 2 * P – L. The second support is P – (R1 – S1) and the second resistance is P + (R1 – S1). The central Pivot point is considered to be the equilibrium price and price movements often stall around the pivot. Range bound days are expected to range between R1 and S1. If either of these fails then R2 and S2 come into play.
In conjunction with other technical indicators the pivot calculations can be helpful in setting entry and exit points for an investment. Some experts advise only buying a stock above its pivot point, and never buying it below. We have been told studies indicate that 70% of investment errors are caused by going against the pivot. However, as more days are range bound than trending some experts advise buying at support and selling at resistance on the basis that price will revert back to the pivot. Stops are typically set outside R1 and S1.
When using pivot figures from Internet sites take care that the figures are today’s.
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Explanations of how to calculate the five points are available in most of the investment glossaries. Similar calculations apply to weekly figures. Glossaries is another search term in FIFTI™ Education.
http://www.traderbetts.com/ has an article that explains the use of pivots.
http://www.thelikosletter.com, accessed through http://www.daytradersusa.com/ posts pivots and the S1, S2, R1, R2 levels each day for the S&P (ES), Nasdaq (NQ) and Dow (YM) e-minis.
http://www.protradingsystems.com/ posts at the top of its home page the pivot and the S1, S2, R1, R2 levels each day for the S&P500, Nasdaq 100, and Dow Industrials indexes. The values are accompanied by brief tips on how to use pivot points.
http://www.hardrightedge.com/ in its Daily / TradeWinds section provides pivots, resistances and supports for 14 different symbols, including Dow, S&P 500, Nasdaq and sector indexes. Enter “pivot” into the Search facility of the site and several articles about pivots are found.
http://www.tradingemini.com/ provides a Floor Pivot Calculator for calculate pivot points ourselves.
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