Calculating Pivot Points
Pivot points are comprised of five lines: a pivot line, two support lines (S1 and S2), and two resistance lines (R1 and R2). See Figure 1 below. By definition, a pivot line is a technical indicator that is derived from calculating the numerical average of the previous period’s high, low and closing prices.
The most common method of applying pivot lines is to calculate them from the daily charts and then apply them to the intra-day charts (i.e. hourly, 30 minutes and 15 minutes). Even though they can be calculated from intra-day charts, doing so tends to reduce the accuracy and significance of the indicator.
The pivot lines can be calculated as follows:
Central Pivot Point (P) = (High + Low + Close) / 3
Support and resistance levels can then be calculated using the following formulas:
First level support and resistance:
First Resistance (R1) = (2*P) - Low
First Support (S1) = (2*P) - High
Second level of support and resistance:
Second Resistance (R2) = P + (R1-S1)
Second Support (S2) = P - (R1- S1)
Third and fourth levels can also be calculated using the model explained above, but these have little value to the trader, since the rest of the market itself places little value on them. Nevertheless, they can be used to track the midpoints of other major levels.