Pivot point

If the day trading bug has bitten you, you might be wondering how to make a beginning, trading in stock, commodity or forex markets. Well, technical analysis — wherein you have to pore at price charts — is one way to help you make trading decisions. But there are few who make do with just the previous day’s high, low and closing price. These people trade with pivot points.

In this system, the number of supports and resistances are calculated using the three price points cited above. A set of trading rules are then followed to put through the trades. These are the formulas for getting the pivot levels,

R3 = H+2(P - L)

R2 = P+ (H - L)

R1 = (P*2) - L

P = (H+L+C)/3

S1 = (P*2) - H

S2 = P - (H - L)

S3 = L - 2(H - P)

P = Pivot point, R1 = resistance 1, R2 = resistance 2, R3 = resistance 3, S1 = support 1, S2 = support 2, S3 = support 3, H = high, L = low.

Let us illustrate pivot-point trading with an example. Suppose the high, low and closing price for a stock were ₹520-1,179.9, ₹500-1,163 and ₹510-1,178.3 respectively. The pivot points using the above formula would be as follows:

P = (520+500+510)/3 = 510

R1 = (510*2)-500 = 520

R2 = 510+(520-500) = 530

R3 = 520 + 2* (510-500) = 540

S1 = (510*2) - 520 = 500

S2 = 510 - (520-500) = 490

S3 = 500- 2(520-510) = 480

Pivot point calculators available online make it easy to derive these values. So, how to put these to use? If the stock price opens above the pivot level, you can go long with stop loss at the pivot and with R1, R2 and R3 as the targets. As the price moves higher, the stop loss can be moved higher to R1, R2, and so on.

Similarly, if the stock price opens below the pivot point, you can go short with stop loss at the pivot and S1, S2 and S3 as targets. If the price opens between any other two levels, for instance, between R1 and R2, then use R1 as stop loss and R2 and R3 as targets.

As with any other system, comfort increases with use. Happy trading!

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