Pivotal prices are used in various ways. Some traders use them to identify support and resistance areas or entry and exit zones, or they may be used to define momentum. There are more than a few ways to determine daily pivot points. The most popular requires some basic math using the average of the high, low and close, and sometimes the open price is included in the equation. On the ensuing day, trading above the pivot point is considered bullish, while trading below the pivot point implies bearish sentiment.

Pivot Calculation with Support/Resistance

The most common way to calculate a daily pivot is to find the sum of high, low and close of the day, and then divide it by 3. From that point we can calculate the first support and first resistance levels. To find first support, multiply the pivot point (PP) by 2, and then subtract the high price. To find first resistance, double the pivot minus the low price. For example:

• SPY high = 510, low = 505, close = 508, then pivot = 507.7
• First resistance would be (507.7 x 2) – 505 (low) = 510.4
• First support would be 505.4, which is 2 x 507.7 minus high (510)

Pivot Points Combined with Average True Range (ATR)

One of my favorites ways to define support/resistance levels is to first calculate a daily pivot, and then calculate an average day range (ADR) using the previous 14 days. Most charting packages have an indicator called average true range (ATR). Use this gauge to determine average ranges for any time frame. To plot resistance 1 (R1) start from the pivot and add 50% of the ADR. To get second resistance (R2) add 100% of an ADR to the pivot price. Conversely, to identify support (S1 & S2) levels subtract 0.5 ADR from the pivot to get S1 and 1 ADR to mark S2.

Of course, this technique can be used to fit your preferred trading style. For longer-term trades use the weekly high, low close to define the pivot. I prefer a 9-week average true range (AWR) to determine support 1 and support 2, subtract 0.5 AWR and 1 AWR from the pivot, respectively. Or add 0.5 and 1 AWR to the pivot to plot resistance 1 and resistance 2. The longer-term support/resistance levels are useful for defining price targets or strikes for option strategies.

Critical Prices vs. Pivots

Pivots are usually computed while critical prices are observed. Sometimes the two are similar. I prefer to use intraday (30 minute) charts to identify critical areas, which I believe are more reliable for defining support/resistance. One type of critical support price is determined by noting the first dip lower following a breakout higher through resistance line. The first bounce higher following a breakout lower would define a critical resistance level.

Set Goals with Pivots

After a violation of a flag or pennant formation is realized, you could start setting targets using ATRs. Projecting targets from a pivot or critical price is a great way to set incremental profits and/or trail stops to lock in potentially more profit.

John Seguin, Market Taker Mentoring