How To Use Pivot Points for Support and Resistance

Daily Levels
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Pivot points are a popular technical analysis tool used by traders to identify potential support and resistance levels in financial markets. They are calculated based on the previous day’s high, low, and close prices and provide key levels that traders can use to make informed decisions. Here’s a step-by-step guide on how to use pivot points for support and resistance, along with an example:

Understanding Pivot Points:

Pivot points are calculated using the following formula:
Pivot Point (PP) = High + Low + Close /3

Support and Resistance Levels:

  1. Pivot Point (PP):

    • The central point of reference. If the current price is above the pivot point, it’s considered bullish; if below, it’s considered bearish.

  2. Support Levels (S1, S2, S3):

    • These are levels below the pivot point that may act as support. Traders often expect a bounce in the price when it reaches these levels.
      Support 1 (S1)=(2×PP)−High
      Support 2 (S2)=PP−(High−Low)
      Support 3 (S3)=Low−2×(High−PP)

  3. Resistance Levels (R1, R2, R3):

    • These are levels above the pivot point that may act as resistance. Traders often anticipate a pullback when the price approaches these levels.
      Resistance 1 (R1)=(2×PP)−Low
      Resistance 2 (R2)=PP+(High−Low)
      Resistance 3 (R3)=High+2×(PP−Low)

Example:

Let’s say you’re analyzing the daily chart of Stock ABC:

  • High = ₹55
  • Low = ₹50
  • Close = ₹52

Calculations:

PP= 55+50+52/3 =52.33

S1=(2×52.33)−55=49.67
S2=52.33−(55−50)=47.33
S3=50−2×(55−52.33)=43.67

R1=(2×52.33)−50=53.67
R2=52.33+(55−50)=55.67
R3=55+2×(52.33−50)=58.33

Interpretation:

  • Pivot Point (PP): ₹52.33
  • Support Levels: ₹49.67 (S1), $47.33 (S2), $43.67 (S3)
  • Resistance Levels: ₹53.67 (R1), $55.67 (R2), $58.33 (R3)

Application:

  • Traders might consider buying near support levels (e.g., S1) or selling near resistance levels (e.g., R1).
  • A break above resistance or below support could signal a potential trend reversal.

Conclusion:

Pivot points provide a structured way to identify potential support and resistance levels. However, they should be used in conjunction with other technical analysis tools for a comprehensive trading strategy. Regularly recalculate pivot points as new price data becomes available.