Equity Market traders often talk about market heading for important support and resistance where markets can show major price moves on either upside and downside. How do the profession traders come up with so called support and resistance levels? One of the method which traders use is Woodie’s Pivot Points, we will discuss how to calculate, interpret and use this technical tool in day trading and swing trading.
The Woodie’s pivot point is the level at which the market direction changes for the day. Woodie’s Pivot Point is used to determine trading levels at which trend is inclined to change direction and head to possible support and resistance. Woodie’s Pivot Points are trend-predicting indicators instead of lagging indicator.
Many traders follow pivot points and this is the reason why the market reacts at these levels. This gives you an opportunity to trade.
Woodie’s Pivot Point Calculation
To calculate the Woodie Pivots the formulas below are used, R1-R3 denote Resistance Levels, PP describes the Pivot Point, S1- S3 are Support levels. This formula also includes the Open. The support and resistance levels that are calculated from the formulas indicate the potential trading ranges for the next trading session.
In order to calculate pivot level, we need 3 prices which are:
H = previous day’s high price
L = previous day’s low price
O = Current Day Opening Price
Then calculate pivot level using this equation:
PP = (HIGH + LOW + (OPEN * 2)) / 4
Support and resistance levels are then calculated using the following formulas:
The first Resistance and Support are calculated using the difference between the Pivot Point and the previous days’ High and Low prices
Resistance Level 1 = (2*PP)-L
Support Level 1 = (2*PP)-H
The second Resistance and Support are based on the width of the trading range (High – Low) and are calculated as
Resistance Level 2 = PP + (H – L)
Support Level 2 = PP – (H – L)
The third Resistance and Support are calculated as
Resistance 3 = High + 2*(Pivot – Low)
Support 3 = Low – 2*(High – Pivot)
These prices are usually taken from a stock’s daily charts, but the pivot point can also be calculated using information from hourly charts. Most traders prefer to take the pivots, as well as the support and resistance levels, of the daily charts and then apply those to the intraday charts (for example, hourly, every 30 minutes or every 15 minutes). If a pivot point is calculated using price information from a shorter time frame, this tends to reduce its accuracy and significance.
The Most important level is the Pivot Level itself as this is the level above or below which the price move will occur towards the Support and resistance levels.
It is important to note that it is extremely rare when a stock index hits daily R3 or S3 levels. If a market/stock rallies till R2 or sells off till S2 which usually ends up being high or low of the day. This knowledge will help temper a trader’s emotions and keep them on track to follow this system.
Traders can use this Link to Generate Woodie’s Pivot Point