The use of Pivot levels was first used at exchanges by pit traders. Trading on the floor of major exchanges has typically been very fast paced. Traders on the floors did not have the option of technical charts or modern computer systems. Therefore there was a need to create a leading indicator that would map out the key daily levels for the floor traders.

Simple Pivot Points:

Simple pivot point levels are calculated by taking the previous day’s high, low and close prices. By employing a simple arithmetic equation the trader can create predictive levels for the day ahead.

The calculation is simple and is as follows:

PIVOT POINT (P) = (HIGH+LOW+CLOSE) / 3

SUPPORT 1(S1) = (P x 2) - HIGH

SUPPORT 2 (S2) = P - (HIGH - LOW)

RESISTANCE 1 (R1) = (P x 2) - LOW

RESISTANCE 2 (R2) = P + (HIGH - LOW)

As the Pivot point is based on the previous day’s data, the levels created are set in place for the whole day's trading. A day trader would look to buy a financial instrument and keep the position up to R1

When reaching R1 the trader had then to make 1 choice between the three options listed below

1. Close long positions and book profits
2. Close long positions and enter a short again R1
3. Allow the price action to break above R1 and hold the position until it tests R2.

Shorts will mirror longs with the trader looking for tests and fades of S1 and S2.

Fibonacci Pivot Points:

Fibonacci Pivot Points points are similar to Simple Pivot Points. The Fibonacci Pivots use the same logic of the calculations shown above; however they also include a Fibonacci element into the calculation.

The calculations are as follows:

PIVOT POINT (P) = (HIGH+LOW+CLOSE) / 3

SUPPORT 1(S1) = P - {0.382 x (HIGH - LOW)}

SUPPORT 2 (S2) = P - {0.618 x (HIGH - LOW)}

SUPPORT 3 (S3) = P - {1 x (HIGH - LOW)}

RESISTANCE 1 (R1) = P + {0.382 x (HIGH - LOW)}

RESISTANCE 2 (R2) = P + {0.618 x (HIGH - LOW)}

RESISTANCE 3 (R3) = P + {1 x (HIGH - LOW)}

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