P. 238

234 PART 7 - Indicators: The Trader’s Compass

How to Calculate the Pivot Point
No need for panic: even though the calculations appear complex, finding
the pivot point is simple, even very simple, and in truth, fairly unimportant.
In short, skip the following explanation if such things bore you!
•	 Pivot Point (PP) is the average of the highest price, the lowest price and

   the closing price of the previous day’s trading:
                       Pivot Point = (High + Low + Close) / 3

Once the pivot point is calculated, we use this to calculate the support
   and resistance points. Note that there is importance to the order of the

•	 S1 is the first (1) level of support (S) and is the pivot doubled, minus the
   high of the previous day:
                                   S1 = (PP x2) – High

•	 R1 is the first level of resistance, and is the pivot doubled, minus the
   low of the previous day:
                                   R1 = (PP x2) – Low

•	 S2 and R2. Once the first levels of support and resistance are calculated,
   we can calculate the second levels of support and resistance:
                                  S2 = Pivot – S1 – R1
                                   R2 = Pivot – S1 +R1

What is the true meaning of the support and resistance lines calculated
relative to the previous day of trading? As with Fibonacci, the pivot lines
would be meaningless if the institutional traders and market makers would
not have made increasing use of these methods. They are again a kind of
self-fulfilling prophecy. The original use of pivot points began when floor
traders would receive lists of pivot points on paper charts at the trading
session’s opening. The nature of their work required constant movement,
shoving each other out of the way with their elbows and shouting over
each other’s heads.They simply could not move around with intraday
charts, so were forced to glance at a ticker of numbers running across the
screens covering the trade hall walls. When the stock they owned moved
up and reached one of the pivot points, what did the traders do next? They
sold. That’s all there was to it. Most of the trading halls have closed, and
traders still physically inside them are apparently using iPads now, but
pivot points have stayed with us. Since institutional traders buy and sell
according to pivot points, it leaves you little choice but to follow their lead,
and give pivot points their due.
   233   234   235   236   237   238   239   240   241   242   243