A Pivot Point is a price level of significance in technical analysis of a financial market that is used by traders as a predictive indicator of market movement. A pivot point is calculated as an average of significant prices (high, low, close) from the performance of a market in the prior trading period. If the market in the following period trades above the pivot point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point is seen as bearish
It is customary to calculate additional levels of support and resistance, below and above the pivot point, respectively, by subtracting or adding price differentials calculated from previous trading ranges of the market.
A pivot point and the associated support and resistance levels are often turning points for the direction of price movement in a market. In an up-trending market, the pivot point and the resistance levels may represent a ceiling level in price above which the uptrend is no longer sustainable and a reversal may occur. In a declining market, a pivot point and the support levels may represent a low price level of stability or a resistance to further decline.
This article covers the topic of pivot points calculating. Different pivot points are the popular and simple tools of technical analysis in trading. In this article the rules for floor, Camarilla, Tom Demark's, and Woodies pivot points are described.
Floor Pivot Points
Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. That's why the classic pivot points are often also referred to as Floor Pivots. They are the most basic and popular type of pivots are widely used in technical analysis. The main aim of a pivot point is to represent a primary level of support/resistance - the point at which the trend can become bearish or bullish. Levels of resistance and support (from first to fourth) serve as the additional points of possible trend breakouts or the trend range limits. These are the rules to calculate floor pivot points (as shown in "Floor Pivot Points(-)"):
Pivot (P) = (H + L + C) / 3
Resistance (R1) = (2 X P) - L
Support (S1) = (2 X P) - H
R2 = P + (H - L)
S2 = P - (H - L)
R3 = P + 2*(H - L)
S3 = P - 2*(H - L)
R4 = P + 3*(H - L)
S4 = P - 3*(H - L)
Sometimes, the average also includes the current period's opening price (O). When we don't have the current opening price, the previous period's opening price is used (as shown in "Floor Pivot Points(O)"):
Pivot (P) = (O + H + L + C) / 4.
Camarilla Pivot Points
Camarilla pivot points are based on the Camarilla equation method developed by Nick Scott. They are presented as a set of eight levels of support and resistance values without a middle pivot point (which is crucial for floor pivot points). The precise way of calculating these pivot points is somewhat unclear. But more important is that these pivot points can still be calculated and work for all traders. They can be used to set the stop-loss and take-profit orders to automate your trading. Use the following rules to calculate Camarilla pivot points:
R4 = (H - L) X 1.1 / 2 + C
R3 = (H - L) X 1.1 / 4 + C
R2 = (H - L) X 1.1 / 6 + C
R1 = (H - L) X 1.1 / 12 + C
S1 = C - (H - L) X 1.1 / 12
S2 = C - (H - L) X 1.1 / 6
S3 = C - (H - L) X 1.1 / 4
S4 = C - (H - L) X 1.1 / 2
DeMark's Pivot Points
Tom DeMark's pivot points are not as popular as floor pivots, but it is even simpler and can be used to determine the range for a current period trading corridor using the High, Low and Close values of the previous period and the Open value of a current period. To calculate DeMark's pivot points one can use these rules:
If Close < Open Then X = H + 2 X L + C;
If Close > Open Then X = 2 X H + L + C;
If Close = Open Then X = H + L + 2 X C;
R1 = X / 2 - L;
S1 = X / 2 - H;
Woodie's Pivot Points
Another way to calculate pivot points are Woodie's pivot points. Woodie's Pivot Points are related to the Classic/Floor Pivot Points in much the same way that an Exponential Moving Average is related to a Simple Moving Average. The closing price has a bigger influence on Woodie's Pivot Point as it does on the Exponential Moving Average. Many traders believe that the high and low prices are a result of emotions in the heat of the battle, while the opening and closing prices are a more accurate representation of the mood of the market. The rules to calculate Woodie's pivot points are as follows:
Pivot (P) = (H + L + 2 X C) / 4
R1 = (2 X P) - L
R2 = P + H - L
S1 = (2 X P) - H
S2 = P - H + L
