Daily Pivot Points

Indicator Type: Non-Indicator

Introduction:
Pivot points used to be referred to as “traders numbers” because of the popularity of these points amongst floor traders. The theory behind them is that markets tend to have overlap from one period to another. On most days, the daily high or low is within the previous days range, as with the previous weeks extremes, and previous months extremes. In this sense, pivot points are a counter trend indicator.

However, many traders believe that once one point is violated, the next point will tested, making a violation of these support and resistance levels a clue in trend following. Though we cannot vouch for the truth of this statement, the popularity of pivot points amongst floor traders tends to make these points worth watching.

The popularity of these numbers can be seen on any day when the exchanges are cleaned-up. The trading floor is literally piled high with folded pieces of paper that contain pivot points calculated on them.

Interpretation:
The uses of pivot points or “numbers” varies greatly by trader. The most common interpretation is this. The daily pivot is used as a guide. If prices are trading above the pivot point, then the trend is considered up. Traders may wish to take short-term positions on a violation of the daily pivot to the upside with an initial upside objective of the 1st Resistance level. If prices stall or slow at the 1st Resistance level, then aggressive traders may wish to take profits. However, if the 1st Resistance level is violated to the upside, then the market should go on to test the 2nd resistance level. If prices have violated the 1st resistance level, then this level should act as support on future pullbacks, acting as support, as should the pivot point.

The converse is true for support levels. A violation of the daily pivot to the downside indicates that the daily trend is down, with a downside target being the 1st support level. If the market stalls, then traders may wish to take profits on short positions, or initiate long positions in anticipation of a retracement to the daily pivot. However, if the 1st support level is violated, the day is said to be a strongly down trending day, and as such should move down further to test the second support level. As with the resistance numbers, the support numbers once violated become resistance lines to trade with in the trend.

Though originally used as a means for floor trading, longer-term traders can use pivot points of longer periods. Try plotting the pivot points on a weekly chart and using it for shorter term positioning on the daily charts. Pivot points can also be calculated using the monthly charts, and used for longer-term positions.

Different Methods: 
There are several methods used to determine the Pivot Point, we have included the three different formulas in Track 'n Trade Pro.

Traditional
Pivot Point = (H + L + C)/3
First Support Line = (2 * Pivot Point) - H
First Resistance Line = (2 * Pivot Point) - L
Second Support Line = Pivot Point - (H - L)
Second Resistance Line = Pivot + (H - L)

Variation 1
This method Changes the formula used to derive the Pivot Point.  The changes include adding the trading day's open and calculating the average of the four values.  In doing this Variation one takes into account both opening gaps and overnight trading.  The formula is:

Pivot Point = (H* + L* + C* + O**)/4

*=Yesterday
**=Today

Variation 2
This method changes the formula used to derive the Pivot Point as well.  In this method you substitute yesterday's close with today's open.  In doing this Variation 2 also takes into account opening gaps and overnight trading.  The formula is:

Pivot Point = (H* + L* + O**)/3

*=Yesterday
**=Today
 

Program Options - Daily Pivot Points

1. Pivot Point Lines:  Pivot Points are made up of 5 Lines.  In the Program Options window you can specify preferences for each line independently.  For information on their value and how they are calculated, refer to the article above.
2. Style & Color:  The Pivot Point Indicator lines can be displayed as a solid, dashed, or dotted.  Click on the drop down menu to specify the type of line style desired.  Next to the style drop down menu is the color box.  To change the line color click on the color box, this will open a color panel for you to choose a new color.
3. Preview Window: This Window allows you to make changes and preview them before saving them.
4. Pivot Points are available in Traditional, Variation 1, and Variation 2. Click on the different radio buttons to change between the three methods. For more in formation on the different methods, see the article above.
5. Show Pivot Point Lines: To display Pivot Point Lines in the chart window, click the check box.  You may also select Pivot Points from the right-click menu for the Chart Window. 
6. Restore Defaults: To restore Pivot Points to Default Settings, click on the Restore Defaults button.
7. Documentation:  This section contains instructions on using Pivot Points.