How to Calculate Complex Pivot Points

The floor pivot points, presented in the first column of the calculation results table, are the most basic and popular type of pivots used in Forex trading technical analysis. The pivot point is interpreted as the primary support/resistance level - the point at which the main trend will be born. First-third level resistance and support points serve as additional indicators of possible trend reversal or continuation. The rules to calculate floor pivot points are quite simple: 

Pivot (P) = (H + L + C) / 3
Resistance (R1) = (2 X P) - L
R2 = P + H - L
R3 = H + 2 X (P - L)
Support (S1) = (2 X P) - H
S2 = P - H + L
S3 = L - 2 X (H - P)

Other popular method of calculating a simple TA indicator which helps trader to forecast future trend is Tom DeMark's pivot points. Which are not pivot points exactly, but predicted low and high of the period. To calculate DeMark's pivot points follow these rules: 

If Close < Open_current Then X = H + 2 X L + C;
If Close > Open_current Then X = 2 X H + L + C;
If Close = Open_current Then X = H + L + 2 X C;
New High = X / 2 - L; New Low = X / 2 - H


Woodie's pivot points are similar to floor pivot points, but are calculated in a somewhat different way, giving more weight to the Close price of the previous period. Use the following rules to calculate Woodie's pivot points: 

Pivot (P) = (H + L + 2 X C) / 4
Resistance (R1) = (2 X P) - L
R2 = P + H - L
Support (S1) = (2 X P) - H
S2 = P - H + L


Camarilla pivot points is a set of eight very probable levels which resemble support and resistance values for a current trend. The origin and the precise way to calculate these pivot points are unclear. The most important is that these pivot points work for all traders and help in setting the right stop-loss and take-profit orders. I use the following rules to calculate Camarilla pivot points: 

R4 = (H - L) X 1.1 / 2 + C
R3 = (H - L) X 1.1 / 4 + C
R2 = (H - L) X 1.1 / 6 + C
R1 = (H - L) X 1.1 / 12 + C
S1 = C - (H - L) X 1.1 / 12
S2 = C - (H - L) X 1.1 / 6
S3 = C - (H - L) X 1.1 / 4
S4 = C - (H - L) X 1.1 / 2

How to Calculate Pivot Points

There are several different methods for calculating pivot points, the most common of which is the five-point system. This system uses the previous day's high, low and close, along with two support levels and two resistance levels (totaling five price points) to derive a pivot point. The equations are as follows:

    R2 = P + (H - L) = P + (R1 - S1)

    R1 = (P x 2) – L

    P = (H + L + C) / 3

    S1 = (P x 2) – H

    S2 = P - (H - L) = P - (R1 - S1) 

Here, "S" represents the support levels, "R" the resistance levels and "P" the pivot point. High, low and close are represented by the "H", "L" and "C" respectively.

How To use pivot points

Pivot points, floor levels, S/R values. Various labels for the same tools: a calculated formula for what should be "fair value" in a market to follow. Before the days of palm pilots, cell phones and the general wireless world, floor traders and market makers relied on hand-scribbled price points of where buyers / sellers should cluster their stops. The information age has arrived, but these valuable price points still retain their power over market action hence.

Interpreting and Using Pivot Points

When calculating pivot points, the pivot point itself is the primary support/resistance. This means that the largest price movement is expected to occur at this price. The other support and resistance levels are less influential, but may still generate significant price movements.

Pivot points can be used in two ways. The first way is for determining overall market trend: if the pivot point price is broken in an upward movement, then the market is bullish, and vice versa. Keep in mind, however, that pivot points are short-term trend indicators, useful for only one day until they need to be recalculated. The second method is to use pivot point price levels to enter and exit the markets. For example, a trader might put in a limit order to buy 100 shares if the price breaks a resistance level. Alternatively, a trader might set a stop-loss for his active trade if a support level is broken.

Conclusion

Pivot points are yet another useful tool that can be added to any trader's toolbox. It enables anyone to quickly calculate levels that are likely to cause price movement. The success of a pivot-point system, however, lies squarely on the shoulders of the trader, and on his or her ability to effectively use the pivot-point systems in conjunction with other forms of technical analysis. These other technical indicators can be anything from MACD crossovers to candlestick patterns - the greater the number of positive indications, the greater the chances for success.

Chart Construction

The X-axis on a chart plots the periods for which prices are plotted and the Y-axis plots the value or the price of the share. This could range from a few hours to a few years. This means that prices can be plotted based on the prices that range from hours to years. Thus we could have minute charts as well as hourly, daily, weekly, monthly, quarterly, yearly charts based on the above data.

Short Term Traders trade on the basis of daily charts as they are more interested in the immediate movement in the stock prices, whereas Medium term to Long term Traders are more dependent on weekly / monthly charts as they want more returns for which they are prepared to wait for a longer duration.

There are 3 types of charts which are commonly used by chartists. These are

1. Line charts: The closing prices are plotted on the graph and are joined to form a line.

2. Bar Charts: The Bar uses open / high / low / close for the session.

3. Candlestick Charts: Also use open / high / low / close for the session.

The 4 quotes that are used to construct a Bar Chart or a Candlestick chart are in the order of Open / High / Low / Close

Line Chart

In a Bar chart the open is indicated by a small hash (- ) which is drawn on the left side of the Bar and the close by another hash on the right side of the bar.

BAR CHARTS

CANDLESTICK CHARTS

In a Candlestick chart the real body i.e. the 2 ends of the body, show the opening and the closing price for the given period. The lines at the top and bottom of the real body are called the shadows and they denote the high and the low for that session. The rectangle is called as the real body of the candle and it denotes the open and the close. The colour of the body denotes the open and the close of that session. If the open to close is on the higher side i.e. it is a bullish candle and vice versa if the close is lower than the open it is a bearish candle. Generally the colors used to denote bullish candles are white, green or blue and the bearish candles are red or black.

TECHNO - FUNDA - The Best Approach

Ideally one should use a combination of both Fundamental Analysis as well as Technical Analysis to decide on an Investment strategy. Fundamental Analysis should be used to spot stocks which have a potential to rise and Technical Analysis should be used to determine the timing i.e. the entry and exit levels.