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Chapter 15, Part I. Pivot points – description and calculation. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 21, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Now let’s talk how to calculate them.



    Calculation of Pivot points

    We will start from pivot point itself, or as it calls just “Pivot”. Also for simplicity lets mark Pivot Point as “PP”, Pivot resistance as “PR” and Pivot Support as “PS”:

    Pivot t = (High t-1 + Low t-1 + Close t-1)/3

    As you can see I add markings “t” and “t-1”. It means that we should use High, Low and Close price of previous trading period to calculate Pivot for current trading period.
    Pipruit: Oh, I see – that’s why you call this indicator as a leading one. We know the High, Low and Close of the previous bar even before the current bar has started. Say, if we talk about the daily time frame, then in the beginning of today’s trading session we’ve already known Pivot point level for it.​
    Commander in Pips: You’re absolutely right. But as we’ve specified, for the daily time frame we have to use weekly and monthly pivots, hence…
    Pipruit: Wait a minute… Week includes five trading days – hence weekly pivot level will be valid for whole coming week, other words – for five future trading sessions! But this is just outstanding issue!​
    Commander in Pips: Heh, that’s what I mean…

    Now, traders usually also calculate Pivot resistance 1, 2 and sometimes 3, and Pivot support 1, 2 and 3. Here are the formulas:

    PR1 = 2xPP – Low
    PS1 = 2xPP – High
    -------------------------------------------
    PR2 = PP + (High – Low)
    PS2 =PP – (High – Low)
    ---------------------------------------------
    PR3 = High + 2x(PP – Low)
    PS3 = Low – 2x(High –PP)

    As you can see, these formulas are very simple when compared to the formulas of some indicators. Still there is some software available that draws these levels automatically. Some software also draws intermediate levels between PP and different PS and PR. But do they really have the same level of significance? Although I can’t take up a position that PS2, PS3 and PR2 and PR3 are quite useless, so as intermediate levels, and maybe you will make a trading system that will be based on these levels, I find that they have quite less importance than PP itself, PS1 and PR1. In general, it is assumed that weekly PS1 and PR1 are low and the high for the coming week. Monthly PS1 and PR1 are low and high for coming month and etc. So, if the market breaks these levels, it tells us about the strength of the market in this direction, and PR2, 3 so as PS 2 and 3 become not so significant.

    At the end of this part I would like to give you another way to estimate pivot point for any time frame. Although this method will not allow you to estimate PR or PS, but it could be useful, if your trading software does not have a Pivot Points drawing tool.

    You have to plot a 1-period Simple moving average, shift it forward for 1 period and it should be plotted on (H+L+C)/3 basis. Almost any software allows you to do it nowadays.
     
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