What Is a Pivot Point? How Is it Calculated?

General Definition of Pivot Points

What is a pivot point? It is a concept that traders should be familiar with as it is essential to any analysis. It serves as a benchmark for determining the probable market direction in the next session and identifying key support and resistance levels of different assets including forex, stock, and commodity markets. STARTRADER offers daily reports containing these points on the most popular assets.

How Are those points calculated?

Determining the pivot points involves calculating past prices for a given period. To do so, analysts utilize several methods, with the most popular ones being Woodie’s method, Classic method, and Camarilla method, which we will discuss in more detail later on. However, before delving into the methods, let’s elaborate further on the pivot points themselves.

A (PP) is a market turning event that shows price expectations for the next session. If the price is trading above the PP, it indicates a bullish market trend. Conversely, if the price is trading below it, it indicates a bearish market trend.

Pivot points are used to identify key support and resistance levels. The primary support and resistance levels consist of the support levels S1, S2, and S3, and the resistance levels R1, R2, and R3. The S1 support level is the strongest support level and the first level to watch out for when the price is moving down. Similarly, R1 is the strongest resistance level and the first level to watch out for when the price moves up.

Different Types of Calculating Pivot Points:

There are three primary types that are calculated using historical prices:

Classic

To start with, in the classic method, we calculate by adding the previous session’s high, low, and closing price and then dividing the result by three. This average is used as the main PP for the next day. Determining support and resistance levels is based on additional values that were calculated using previous prices. As for additional levels, they can be calculated using the following rules:

Fibonacci

The Fibonacci method is a calculation approach similar to the Classic PP, with the inclusion of Fibonacci levels to derive additional values. Additional levels can be calculated as follows:

Woodie

Woodie is another method of calculation developed by Tom Woodie, a famous American trader. This method is considered one of the most popular ones. Though similar to the classic , Woodie method differs from the Classic method as it takes into account several factors, such as the current closing price, the previous closing price, and changes in price.

The formulas used to calculate Woodie’s PP are as follows:

PP = (H + L + 2C) / 4

R1 = (2 * PP) – L

R2 = PP + H – L

S1 = (2 * PP) – H

S2 = PP – H + L

Where: C is the last closing price

Camarilla

Camarilla is a method of calculating used in analyzing price charts of financial assets. This method was developed by a trader named Nick Stott. It is considered one of the most popular methods of calculating along with the other methods mentioned.

Calculating those points in the “Camarilla Way” differs from the classical method, where the base one and possible resistance and support levels are determined based on the last closing price and the high and low prices of the specified time period. The Camarilla calculation method is based on dividing the daily price range into 8 possible levels, including 4 support levels and 4 resistance levels.

It can be calculated using the following formulas: 

Ø  PP= (High+Low+Closing) / 3

·        R4 = C + ((H-L) x 1.1/2)

·        R3 = C + ((H-L) x 1.1/4)

·        R2 = C + ((H-L) x 1.1/6)

·        R1 = C + ((H-L) x 1.1/12)

·        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)

Example Cases for Calculating these Points.

Case 1: Open price is between H3 and L3

Buy when the price move back above L3 after going below L3. Target will be H1, H2, H3 levels. Stop loss can be placed at L4 level

Wait for the price to go above H3 and then when it move back below H3 again sell or go short. Target will be L1,L2 L3 levels and stop loss above H4.

Case 2: Open price is between H3 and H4

Buy when the price move back above H3 again after going below H3. Target will be 0.5%, 1% and 1.5% . Stop loss can be placed at H3

Wait for the price to go above L3 and then when it move back below L3 again sell or go short. Target will be L1, L2, and L3 levels and stop loss above H4. Target L1, L2 and L3.

Case 3: Open price is between L3 and L4

Wait for the price to go above L3 and then when it moves back above L3 again go long. Target will be H1,H2 H3 levels and stop loss  below L4.

Wait for the price to go below L4 and then when it moves below L4 go short. stop loss above L3. Target 0.5%, 1% and 1.5%

Open price is above H4

Buying can be risky at this level. Wait for the price to go below H3. As soon as the price moves below H3 go short. Stop loss above (H4+H3)/2. Target L1 , L2 and L3.

Open price is below L4

Selling could be risky at this level as price has opened with big gap down. Wait for the price to go above L3. When the price moves above L3 buy with stop loss of (L4+L3)/2. Target H1, H2 and H3.

Final takeaway:

To conclude, Traders and analysts often rely on pivot points to make informed trading decisions once they have started their trading account. By observing whether the price is above or below these points, they can assess the general market trend as bullish or bearish. Additionally, these points help identify key support and resistance levels, enabling traders to determine potential entry and exit points for their trades. However, it is crucial for traders to utilize risk management tools, regardless of their experience in reading charts and performing calculations.