How Pivot Levels Are Calculated

How to Calculate Pivot Levels: A Comprehensive Guide

 

Pivot levels are a popular technical analysis tool that helps traders identify key support and resistance zones. These levels are based on the data from the previous trading session and provide an objective way to analyze market conditions. In this guide, we’ll delve into how pivot levels are calculated and how they can be effectively used in trading.

How Are Pivot Levels Calculated?

 

To begin, the central pivot level (PP) is calculated as the arithmetic mean of the high price (High), low price (Low), and closing price (Close) of the previous trading session.

 

Formula for PP:

PP = (High + Low + Close) / 3

 

Once the central pivot level is determined, support (S) and resistance (R) levels are calculated for different intervals.

 

First Support and Resistance Levels (S1 and R1):

•R1 = (2 × PP) − Low

•S1 = (2 × PP) − High

 

Second Support and Resistance Levels (S2 and R2):

•R2 = PP + (High − Low)

•S2 = PP − (High − Low)

 

Third Support and Resistance Levels (S3 and R3):

•R3 = High + 2 × (PP − Low)

•S3 = Low − 2 × (High − PP)

Additional Levels

 

Some analytical platforms provide intermediate levels between the primary support and resistance levels. These additional levels (e.g., S1.5, R1.5) help traders more precisely identify reversal points and price pressure levels.

Tools for Automatic Calculation

 

If manual calculations seem complex, don’t worry! Modern trading platforms such as MetaTrader, Thinkorswim, or TradingView automatically calculate pivot levels. All you need to do is specify the time frame and market you are analyzing.

 

For those who want to test the tool on historical data or perform custom calculations, online pivot calculators are available. Simply input the High, Low, and Close values, and the calculator will provide the support and resistance levels.

How to Choose the Right Data for Calculation?

1.Timeframes:

Pivot levels are calculated based on the previous session. For intraday trading, this is the end of the prior trading day. For weekly or monthly calculations, use data from the last week or month.

2.Accuracy of Data:

Ensure that the High, Low, and Close values used are accurate representations of the trading session. Errors in data can distort the support and resistance levels.

Example of Pivot Level Calculation

 

Let’s assume that the previous session for EUR/USD had the following data:

•High: 1.1500

•Low: 1.1400

•Close: 1.1450

 

Step 1: Calculate PP

PP = (High + Low + Close) / 3 = (1.1500 + 1.1400 + 1.1450) / 3 = 1.1450

 

Step 2: Calculate R1 and S1

R1 = (2 × PP) − Low = (2 × 1.1450) − 1.1400 = 1.1500

S1 = (2 × PP) − High = (2 × 1.1450) − 1.1500 = 1.1400

 

Step 3: Calculate R2 and S2

R2 = PP + (High − Low) = 1.1450 + (1.1500 − 1.1400) = 1.1550

S2 = PP − (High − Low) = 1.1450 − (1.1500 − 1.1400) = 1.1350

 

Step 4: Calculate R3 and S3

R3 = High + 2 × (PP − Low) = 1.1500 + 2 × (1.1450 − 1.1400) = 1.1600

S3 = Low − 2 × (High − PP) = 1.1400 − 2 × (1.1500 − 1.1450) = 1.1300

Using Pivot Levels in Trading

 

Pivot levels can be applied effectively in both trending and ranging markets.

 

1. Trading the Bounce (Range Trading):

 

If the price approaches a support or resistance level and starts to reverse, this can signal an entry in the opposite direction.

 

2. Trading the Breakout:

 

If the price breaks through R1 or S1 decisively, it often signals a continuation of the trend.

 

3. Stop-Loss and Take-Profit Placement:

•Place stop-loss orders beyond the nearest resistance or support level.

•Set take-profit orders at subsequent levels (R2, R3, S2, or S3).

When Are Pivot Levels Most Effective?

1.High Volatility Periods:

Pivot levels serve as excellent guides during active market conditions, such as after news releases.

2.Quiet Periods:

During flat or consolidating markets, pivot levels help identify key zones where reversals are likely.

Limitations of Pivot Levels

1.Do Not Account for Fundamental Factors:

Strong news events or unexpected developments can render pivot levels irrelevant.

2.May Be Ineffective in Low Volatility Markets:

In slow-moving markets, pivot levels can produce false signals.

Conclusion

 

Pivot levels are a versatile tool that suits both beginner and professional traders. They offer a straightforward and objective method for market analysis, helping to pinpoint key entry and exit points.

 

To maximize their effectiveness, combine pivot levels with other tools like candlestick patterns, indicators, or volume analysis. Always test the tool on historical data and evaluate its performance. Success in trading depends on discipline and a thorough understanding of the tools you use. Good luck!