Pivot Point
The Pivot Point is calculated simply by taking the average of the High, Low and Closing Price of a particular stock of the current period (a day, a week, a month, a quarter etc). It is also used to compute the Resistance (R1, R2, R3) and Support (S1, S2, S3) levels of the particular stock and are usually plotted alongside them.
Pivot = (High + Low + Closing Price) / 3
The Pivot Point and its associated Resistance and Support levels are used for prediction. They are the representative values where many traders base their buying or selling decisions for the next period. (For example, the Pivot Points computed from the current day will predict the prices and resistance / support levels for the next day).
Resistance Levels
The Resistance Levels (R1, R2, R3) are derived from the Pivot Point, and High and Low values of the current period (of the current day, week, month, quarter etc). They represent the resistance levels where the price of the stock is unlikely to exceed (in the next day, week, month, quarter etc) when it increases.
They are calculated using the formulas
Resistance 1 = 2 * Pivot – Low
Resistance 2 = Pivot + (High - Low)
Resistance 3 = High + 2 * (Pivot - Low)
When the price of the stock increases and is near a resistance level, many traders watching the level will normally react to it and sell the stock, thus creating a 'resistance' that prevents the price from going higher. In the (unlikely) event that the resistance level is broken, it is then expected that the price will further increase, and the resistance level will turn into a support level.
Support Levels
The Support Levels (S1, S2, S3) are derived from the Pivot Point, and High and Low values of the current period (current day, week, month, quarter etc). They represent the support levels that the price of the stock is unlikely to fall below (in the next day, week, month, quarter etc) when it decreases. They are calculated using the formula
They are calculated using the formulas
Support 1 = 2 * Pivot – High
Support 2 = Pivot - (High - Low)
Support 3 = Low - 2 * (High - Pivot)
When the price of the stock decreases and is near a support level, many traders watching the level will normally react to it and buy the stock, thus creating a 'support' that prevents the price from going lower. In the (unlikely) event that the support level is breached, it is expected that the price will further decrease, and the support level will turn into a resistance level.
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