On the Chicago exchange floors, the Pivot Point is defined as the average of the previous session's high, low and settlement prices. Pivot analysis formulas are then used to calculate two resistance lev-els above the Pivot Point and two support levels below the Pivot Point. One characteristic of the pivot support and resist ance numbers is that the range bet ween the numbers will be larger as the daily range is larger, and vice versa. The formulas for the five values are: R2 = P + H - L R1 = (2 x P) - L Pivot Point = (H + L + C)/3 S1 = (2 x P) - H S2 = P - H + L where: P = Pivot value H = Session high L = Session low C = Session settlement There are some other formulas which can be used to derive the support and resistance numbers but they are used much less frequently. For example, the first resistance level can also be defined as the Pivot Point value plus 1/2 the previous session's range. The first support level can be calculat ed similarly on the downside. The met hod that Opt ima uses, however, is t he most widely used method and the same pivot numbers are carried internationally by at least one other major research firm. B. Trading Uses Pivot numbers are used primarily as support/resistance numbers. Of the Pivot values, the Pivot Point itself is the best support/resistance level. The 1st and 2nd support/resistance levels have less reliabilit y. All t hese pivot numbers, however, are very popular on the exchange floors and are used by a significant number of traders. The Pivot Point itself can also be used as somewhat of a test price for the short-term trend. The Pivot Point represents a weighted average of the previous day's session since it is the average of the high, low and settle-ment . Thus if the market rallies above the Pivot Point , for example, the market may be indicat ing some strength. A weak market would be suggested by a price move below the Pivot Point.
prox asked what the LOGIC behind them is. I asked myself the same question and still don't know so I never used them. Plus it's a pain to calculate them every morning. I would never pay to get any number to trust blindly especially if I don't understand the logic.
I don't know what the origin is, but presume it is the natural rhythm of support and resistance which has been abstracted into a relatively simple formula. The reason for its use is exactly because it is used by a lot of traders and so it has become a self-fullfilling technical indicator. The easiest way to test it is to watch the lets say E-Mini during the day as it trades against the pivots. I think many if not most technical indicators, especially those that are favorites and thus heavily used fall into the same category of self-fullfillment. Be aware, however, that the "standard" pivots have a far lower score when compared with "proprietary" pivots which specialty houses sell to large brokerages. They are far more complex and are primarily based on statistical analysis of the markets. In fact, it is impossible to abstract a technical indicator into an imperical formula ( that would be the Holy Grail). The only mathematical "solution" is a statistical analysis of various aspects of the markets to try and gain a slight advantage against the rest of the players.
jhburton, those S3/R3 formulas aren't correct. Here are the correct pivot formulas: P = (H + L + C) / 3; R1 = 2 * P - L; S1 = 2 * P - H; R2 = (P - S1) + R1; //Also same result: P + (H - L) S2 = P - (R1 - S1); //Also same result: P - (H - L) R3 = (P - S1) + R2; //Also same result: (P + R2) - S1 S3 = P - (R2 - S1); //Also same result: (P - R2) + S1 Some references re. S3/R3: http://www.softwarenorth.net/temp/StudWeek/nwdp1.doc http://www.fibonaccitrader.com/HELP40/INDICATORS/Pivot/default.htm http://www.tradesphere.us/ - Tradesphere Pivot Buddy calculates pivots to R5/S5 - Formulas to R3/S3: Click on Training Center > Pivot Points
I use a formula that is much different than any I have seen posted here. I used the conventional method for 15 years with mixed success, until I came across this new formula. I will use nothing else now.
Can you give me the phone numbers of these institutions, please? I've been looking for them for the LONGEST time ! But seriously, it's important to understand that it's not the S&R levels themselves which will make you profitable. No S&R level will always work. It's HOW you trade them that counts! Phil www.sp-levels.com