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## Pivot Point as Support and Resistence

CALCULATION

A pivot point is the price at which the direction of price movement changes. It is calculated using data from the previous trading day. By looking at the high, low, and close, you can calculate the next day’s pivot point as well as support and resistance levels.

Many variations exist for calculating the pivot point and its related support and resistance levels. Here are a few:

First support = (2 * Pivot) – H

First resistance = (2 * Pivot) – L

Second support = Pivot – (H – L)

Second resistance = Pivot + (H – L)

• Variation 1

One variation involves adding the trading day’s open and calculating the average of the four values. This takes into account any opening gaps and also accounts for overnight or extended-hours trading. The formula changes to:

Pivot point = (Hyesterday + Lyesterday + Cyesterday + Otoday)/4

The support and resistance calculations remain the same.

• Variation 2

Another variation of the calculation is to substitute yesterday’s close with today’s open. This also accommodates opening gaps and extended-hours trading. The calculation

changes to:

The calculations for the support and resistance levels remain the same.

IN THEORY

The pivot point should be the first place you look at to enter a trade. Only when prices reach this point will you be able to determine whether to go long or short and set your profit objectives and stops accordingly. Generally, if prices are above the pivot it’s considered bullish, and if they are below, it’s considered bearish. Suppose the price is below the pivot at the open and you decide to go short at that point. The first price you will look at to cover is the first support level. Of course, you would rather hold onto the short position if there were an indication that prices will fall further. If traders are reluctant to lowerprices, you should cover your short position at the first support level. However, if you see prices continue to fall below the first support level, then you should place a stop-loss order just above the first support level and watch carefully. If prices fall further still, you will have to use a trailing stoploss and keep moving it lower to take advantage of higher profit margins. Typically, the second support level will be the expected lowest point of the trading day and should be your ultimate profit objective. When prices reach this level, the last thing you want to do is go long. So cover your short position and stay out of the market! You should opt to go long in your strategy only when the price retraces back t the pivot and penetrates it to go up toward the first resistance level. The converse applies to an uptrend. If prices were above the pivot, you would enter a long position and use the first and second resistance levels as your profit objectives.

STRATEGY

When using pivot points to determine entry and exit points for

the following day’s trading, I use the following strategy:

1 Calculate pivot point and support/resistance levels.

2 Determine the direction of the daily and weekly trend.

3 Set profit objectives and stops.

4 Wait 20 to 30 minutes after the market opens for prices to stabilize.

5 Enter long positions if the trend is up and price is turning in an upward direction from the pivot.

6 Enter short positions if the trend is down and price is turning in a downward direction from the pivot.

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