A Short Course in Technical Trading

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The second lesson

Pivot Points Basics

This strategy is almost entirely based on Pivot Points, but not the traditional ones. The most common formula
for calculating pivot points is this:

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)

As you can see, this formula gives you back 5 different levels:

Resistance 2 (R2)
Resistance 1 (R1)
The Pivot (P)
Support 1 (S1)
Support 2 (S2)

What you do is take the “High”, “Low” and “close” prices from the previous session and what you get is a
series of 5 different levels that will give you some idea about what will be the range where price is going to
move during the coming session. The “session” can be 1 day, 1 week, 1 month, 4 hours, 8 hours….whatever
you want it to be. So lets say we are day traders and we want to know what are the pivot points for today, what
we have to do is to look at the chart from Yesterday and see what was the High, Low and Close and then
calculate the pivots using the simple formula explained below. Here’s an example looking at the chart above.

We take a chart from the past session, we want to know the pivot points for this coming day (the coming 24
hours), so what we have to do first is to look at the chart from the past 24 hours. Above, we have a 30 minutes
chart for EUR/USD. I have already marked the High(1.1996), Low(1.1839) and Close(1.1871).

We are going to take this data and calculate the pivot points for the next session. First, we calculate the Pivot:

P= (H+L+C)/3 P= (1.1996+1.1839+1.1871)/3 P= 1.1902

It’s very simple math, now that we have the pivot point value we can calculate the support and resistance
levels:

R2=1.2059
R1=1.1965
P= 1.1902
S1=1.1808
S2=1.1745

Now, above we have the chart for the session we calculated the pivot points for. As you can see, on this
particular case price only touched two levels, the pivot and support 1. I am not going to get into the whole
explanation about how price acts on the different support and resistance levels, first because it would take too
long and second because it’s not necessary. This is just an introduction to pivot points for those who have no
idea of what they are.

So, you take the previous session data, you make a few numbers and you got the 5 levels pivot points for the
next session. Now, this is not the only formula for calculating pivot points and it is not the formula we are going
to use (even we are not going to use the formula I’ve been explaining during these 2 pages, I thought it was
important for you to know it).

Thomas DeMark’s Pivot Points

As you can imagine, we are going to use Thomas DeMark’s pivot points formula, which is very different from
the traditional one. DeMark’s formula gives you only two levels, High and Low. You wont have the pivot point
and 2 support/resistance levels for the next session, you will only have the High and Low for the next session.

From now on, when I talk about Pivot points I will be referring to DeMark’s pivot points.

At first, you will find DeMark’s pivot points a little harder to calculate because the formula you have to use
depends on the price action of the previous session. Suppose it’s Sunday and we want to calculate the pivot
points for the next week, just like with the traditional formula we have to look at the chart from the previous
session. On this case, if we want to calculate the pivot points for this coming week first we need to look at the
chart from the past week and take note of the High, Low, Open and Close.

DeMark’s formula works this way:
You look at the previous week data, High, Low, Open and Close.

Scenario 1

If Close is LOWER than Open (close

High + Low + Close + Low = X

Projections for the coming week are:

HIGH for the coming week = X/2 – Low
LOW for the coming week= X/2 – High

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