How to Identify a Stock's Support and Resistance Levels Using Pivot Points
A pivot point is a price level that you can use to calculate support and resistance levels on a stock chart. Resistance is a high level to which a stock's price may increase and change direction, while support is a low point to which a stock's price may decrease and change direction. For example, a stock may rise to a resistance level of $5, then fall to $4.50. You can calculate these levels and draw horizontal lines on a stock chart to represent them. The levels consist of a horizontal pivot point with three resistance levels above the pivot point and three support levels below.
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Instructions
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Determine a stock's highest price, lowest price and closing price from the prior trading day. Calculate the sum of these numbers and divide your result by 3 to calculate the pivot point for the current day. For example, if a stock reached a high of $10, a low of $9 and closed at $9.50, calculate the sum of these prices to get $28.50. Divide this by 3 to get a pivot point of $9.50.
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Multiply the pivot point by 2. Then subtract the stock's low to calculate the first resistance level, R1. In the example, multiply $9.50 by 2 to get $19. Subtract $9 to get an R1 of $10.
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Multiply the pivot point by 2. Then subtract the stock's high to calculate the first support level, S1. In the example, multiply $9.50 by 2 to get $19. Subtract $10 to get an S1 of $9.
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Subtract S1 from R1. Add the pivot point to your result to get the second resistance level, R2. In the example, subtract $9 from $10 to get $1. Add $9.50 to get an R2 of $10.50.
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Subtract S1 from R1. Subtract your result from the pivot point to get the second support level, S2. In the example, subtract $9 from $10 to get $1. Subtract $1 from $9.50 to get an S2 of $8.50.
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Subtract the stock's low from the pivot point. Multiply the result by 2. Then add the stock's high to your result to calculate the third resistance level, R3. In the example, subtract $9 from $9.50 to get 50 cents. Multiply this by 2 to get $1. Then add $10 to $1 to get an R3 of $11.
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Subtract the pivot point from the stock's high. Multiply the result by 2. Then subtract your result from the stock's low to calculate the third support level, S3. In the example, subtract $9.50 from $10 to get 50 cents. Multiply this by 2 to get $1. Then subtract $1 from $9 to get an S3 of $8.
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Draw horizontal lines on the stock's chart at the pivot point's price and at the price of each support and resistance level. In the example, draw a horizontal line at $9.50 to represent the pivot point, and draw a horizontal line at the price of each support and resistance level.
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Tips & Warnings
This example applies to stock charts with time frames up to 15 minutes. Use the high, low and close from the prior week to calculate support and resistance levels for 30 and 60 minute charts, and use the high, low and close from the prior month for charts with a daily time frame.
Pivot points change based on the prior period's data, so you need to recalculate them each day, week or month depending on your chart's time frame.
Support and resistance levels are guidelines only. Instead of reversing at a support or resistance level, a stock's price may break through the level.
References
- Photo Credit Duncan Smith/Photodisc/Getty Images
