What is Pivot Point?
A pivot point is a simple average of the high, low and closing prices of the previous trading period.
At times, the average may also include the open price of the current period and others include the opening price of the previous period as well.
Pivot Point Formula
There are many commonly accepted pivot point calculation formulas.
Pivot point (P) = Arithmetic average of high (H), low (L), and closing (C) prices of the previous trading period.
P = (H + L + C) / 3
Pivot point (P) = Arithmetic average of open(O), high (H), low (L), and closing (C) prices of the previous trading period.
P = (O + H + L + C) / 4
Pivot point (P) = Arithmetic average of open(O) of the current period and high (H), low (L), and closing (C) prices of the previous trading period.
P = ((Current O) + Previous(H + L + C)) / 4
For daily calculation the formula becomes:
P = ((Today’s Open) + Yesterday’s (H + L + C)) / 4
There are other formulas where more emphasis is on the closing price. So instead of adding an open price to the formula, add an extra closing price to the average.
P = (H + L + C + C) / 4
Whatever be the formula, the pivot point is a simple average of the complete price action of a candlestick.
Significance of Pivot Point
Pivot point divides the price action into two bands. The band higher than the pivot point calculated as ( H – P ) and the band lower than the pivot point calculated as ( P – L ).
If the market in the following period trades above the pivot point and in the higher price band, it is a sign of bullish sentiment, whereas if the market is trading below the pivot point and in the lower price band, it is a sign of bearishness.
Support and Resistance Levels With Pivot Points
Support and resistance levels are the most crucial part of any trading system. The pivot point helps in determining the first second and third level of support and resistance levels.
The first resistance level or R1 is the higher band from the pivot point mathematically represented as
R1 = P + ( P – L ) = 2xP – L
Similarly, the first support level or S1 is the lower band from the pivot point mathematically represented as
S1 = P – ( H – P ) = 2xP – H
The second set of resistance (R2) and support (S2) levels are calculated from the complete trading range of prior period (H − L) and added to or subtracted from the pivot point respectively.
R2 = P + (H − L)
S2 = P − (H − L)
The third set of resistance (R3) and support (S3) levels are calculated by adding the complete range ( H – L ) to the first resistance level or subtracting from the first support level.
R3 = R1 + (H − L)
S3 = S1 − (H − L)
Pivot Point Calculation For NSE Nifty
Let us put the pivot point calculation in a chart along with the first level of support and resistance levels.
On 24th July 2017, Nifty’s high low close was:
- H = 9982.05
- L = 9919.60
- C = 9966.40
So Pivot P = 9956 (Represented with blue line in above figure)
So S1 is = 2xP – H = 9929.95 (Represented with green line)
And R1 is = 2xP – L = 9992.40 (Represented with red line)
Drawing the pivot and first set of support and resistance levels on the 15 minutes Nifty chart, we see the following day, opening tick was above the R1 level but it couldn’t sustain the resistance.
Note: In the above figure, we have drawn the P, R1 and S1 on the same day’s price action but it can also be drawn on the following day’s price action as an indicator of support and resistance level for that trading day.
The pivot point is widely followed by many traders and ShareKhan’s interface shows first, second and third level of support and resistance levels for each of the stock in your DP.