Using pivot points to predetermine support and resistance price levels.

John Person has been analyzing and trading stocks, futures and options for 26 years. He is the editor of a weekly newsletter, The Bottom Line Financial Report. John Person also appears regularly on CNBC and is widely quoted in the press. He writes a daily market report, which is one of the only outside analysts that is posted on the Chicago Board of Trade's (CBOT) website. He speaks at numerous seminars around the country. John Person's book, A Complete Guide to Technical Trading Tactics, published by John Wiley and Sons, reveals more details about when and how to use pivot point analysis. You can reach John Person by his email at jperson's email.

Many traders have probably heard the term pivot point analysis and recognize that they have some bearing on price action. However, most individual traders and even brokers are not familiar with how to trade using the target numbers derived from the pivot point formula. Perhaps because of the time involved in calculating the numbers. But professional traders including myself look at pivot points, so you should probably be aware of what they are. Some recent chart examples in the article below reflect the validity of the pivot point concept. With pivot point in the name, you might guess that these price levels are very significant to some traders, especially to those "old school" traders who have been following pivot point support and resistance levels for many years. A pivot point is simply a computed number based on the high, low and close of the previous price bar, whether the time period is a day, a week or a month. Using that pivot point number, traders calculate support and resistance levels, which are considered to be price brackets for the current time period. The actual pivot point calculation is what is used as the basis in the CCI or commodity channel index and even in Bollinger Bands. Pivot point analysis is a famous technique that is used as a price forecasting method for day traders and professional traders as well. It is very popular among professionals, I should know I am one of them that uses it in my studies. There are numerous advisory services, brokerage firms and independent traders that use one form of it or another. Secret floor traders numbers, support and resistance levels, price range forecasting tactics, pin pointing tops and bottoms and target trading are some of the terms that are used to refer to it as well. For most traders on the floor of the exchanges it is considered common knowledge or old school of teaching. Most novice individual investors and even brokers are not familiar with this formula. I believe that most inexperienced investors have a hard time with incorporating this technique in their trading “tool box” due to the time it takes to calculate the numbers. But make no mistake the professionals’ look at it and so should you. In order to determine the current pivot point support and resistance levels, this website includes a free pivot point calculator. but if you wish to develop your own in excel the first step is to find the pivot point number and then use that in the four calculations:

PP = (H + L + C)/3

The first resistance level(R1)=(PPx2)-L

The second resistance level (R2)=PP+H-L

The fist support level (s1)=(PPx2)-H

The second support level (S2)=PP-H+L

All right, now that we have that established you can see it is a detailed formula. So let’s try to simplify it. Consider the pivot point as the average of the previous sessions trading range combined with the closing price. The numbers of support and resistance that are calculated indicate the potential ranges for the next time frame based on the past weight of the markets strength or weakness derived from the calculations of the high, low and distance from the close of those points. Pivot point analysis is also used for identifying breakout points from the support and resistance numbers. The previous sessions trading range could be based and calculated for an hour, a day, a week or a month. Most trading software includes these numbers on a daily basis so that you do not have the tedious chore of doing it the old fashion way, by hand using a calculator. The really old fashion way doesn’t use a calculator. Don’t make your job harder try the easy way. The pivot point calculator has been added to the website, all you need to do is input your high, low and close values to the second decimal point and hit the submit button. This pivot point calculator will give you the pivot point, the projected 1st resistance, the 2nd resistance the 1st support and the 2nd support values. Click on this link to access the pivot point calculator. It is free and no hassle to use.

If you wish to read more about pivot point analysis John Person wrote the first book on combining Candlesticks and pivot point analysis. Click here to learn more. In addition, here is an excerpt from that first book... Since most technical analysis is derived from mathematical calculations the common denominators that are used are the high, low, close and the open. This is what is used for plotting a bar chart. More notarized techniques like Moving averages, Relative Strength Index, Stochastics, and Fibonacci numbers are all calculated using mathematics based on those points of interest. It is also what is published in the Newspapers. It is there for a reason. The concept is this, as technical analysts we are trying to use past price behavior to help us indicate future price direction. This sounds absurd because no one can predict the future, right? Well I am not trying to predict the future I just want an Idea of where prices can go in a given time period based on where they have been. After all isn’t that similar to the concept of drawing trend lines? If the professional traders are looking at these pivot point numbers why wouldn’t I want to look at them as well? Anything that can help me make better decision by determining a game plan that integrates a better level of risk and a potential profit objective can’t be bad. Remember, I won’t know where I am going if I don’t know where I have been. That is what this method helps you to do, navigate future price moves based on the previous time frames data. Before going any further let me further explain who uses the pivot point numbers, mainly floor traders, hedge funds, prop traders and large speculators all use them. However, the popularity is growing as investors quest for education increases. I picked up on the method back in 1984 as a colleague was showing me how to day trade the foreign currencies, namely the Swiss Franc and the German Deutsche Mark. This was way before forex was popular. In fact trading currencies at the CME has been around since the 1970's. Pivot Point analysis and using a pivot point calculator worked fairly well in those days so I incorporated it for the market I had a passion for, which was Bonds. After using them for some time as a “crutch” I was losing interest as a day trader. I experimented with them using this concept of a longer time period namely on a weekly basis. Wow what a discovery! Then I came to the conclusion to try to use them on a Monthly basis after all I was a believer in Daily, Weekly and Monthly Charts. In fact the Chicago Board Of Trade use to give out a monthly Bond Chart and another friend of mine on the floor use to get together with me for “homework” sessions. We would do longer term chart studies using Moving Averages. I figured why not look at the monthly pivot point price targets too. WOW again! I discovered that I could look at a potential price range target in the future based on price action in the past. The longer the time frames the more power or market move would happen. I also discovered the power and leverage of options as they were introduced in to the futures market with the first market being … you guessed it Bonds. I hit a grand slam home run that lasted through most of 1986. You see I was bullish and the era of Reaganomics was happening! Interest rates were declining from 14% and Bond prices were exploding (bonds have an inverted relationship between yield and price). That was a great time. I made a lot of money and I made other people a lot of money too.

In stock trading and stock index futures or ETF's many sophisticated traders watch other indicators. For example, the three big internal indicators are the Tick, the Trin, and the widely watched fear indicator the VIX.

TICK	The TICK indicator is based on the statistic computed from the net of all up-ticks  minus all down-ticks at a given point during the day in NYSE. If 500 stocks advanced on their last trade or TICK, 200 declined and 500 were unchanged, the TICK would be +300 (500 minus 200). The closing TICK is based on the last trade of the day. TICK statistics are available for the NYSE, NASDAQ and AMEX. The High 5 indicator complex uses only the NYSE numbers.
TRIN	The TRIN (also known as the ARMS Index, named after its inventor, Richard Arms) is short for Traders Index. It is a contrarian indicator to detect overbought and oversold levels in the market. Because of its calculation method, the TRIN has an inverse relationship with the market. Generally, a rising TRIN is bearish and a falling TRIN is bullish. The TRIN is the advance/decline ratio divided by the advance volume/decline volume ratio. The formula for calculating it is: ((Advancing issues/declining issues) / (advancing volume/declining volume))
VIX	VIX stands for the CBOE Volatility Index. VIX is a weighted measure of the implied volatility for 8 OEX put and call options. Typically, VIX (and by extension implied volatility) also has an inverse relationship to the market. The value of VIX increases when the market declines and decreases when the market rises.

These indicators were also described in the book, A Complete Guide to Technical Trading Tactics, by John Person.

To read more you can buy the books and courses written by John Person, click here to buy your book or trading courses. John has also written many articles on Pivot point analysis and how he uses the pivot point as a moving average. Please click here to read the Pivot Point article written by John Person.