The closing price has a bigger influence on Woodie’s Pivot Point as it does on the Exponential Moving Average. Many traders believe that the high and low prices are a result of emotions in the heat of the battle, while the opening and closing prices are a more accurate representation of the mood of the market. The best way to show the difference is to calculate both Pivot Points for the February 24th session. The Classic Pivot Point is calculated using the high, low and closing prices from February 23rd, which for the EUR/USD were:
High – 1.3691
Low – 1.3496
Close – 1.3504
The formula for calculating the Classic Pivot Point is to simply add these three price levels and then to divide by three.
1.3691 + 1.3496 + 1.3504 = 4.0691/3 = 1.3564
Woodie’s Pivot Point is calculated by using the high and low prices from February 23rd and the open price from February 24th, which for the EUR/USD were:
High – 1.3691
Low – 1.3496
Open – 1.3504
It is not unusual for the close from one session to be the same price as the open for the next since the FX markets trade 24 hours a day.
The formula for calculating the Woodie’s Pivot Point is to simply add the high price to the low price and then to add the opening price twice, and then to divide by four.
1.3691 + 1.3496 + 1.3504 + 1.3504 = 54195/4 = 1.3549
You can see how the most recent price is given greater emphasis in Woodie’s Pivot Point formula, much the same way an Exponential Moving Average emphasizes the most recent closing prices over earlier closing prices in its calculation.
This 5-minute chart of the EUR/USD shows how the 1.3549 Woodie’s Pivot Point offered resistance before the eventual break up through that level as a result of the release of a scheduled US economic report . The market opened below the Pivot Point, so the trader would initially have a bearish bias, meaning that looking for sells was the preferred play.
Pivot Points can be a valuable tool for the day trader since these support and resistance levels offer a reference point to use in a complete approach to trading.
Professional traders always are in search of key levels that either repel price or, after trading through it, accelerate price action in a predictable direction. The Camarilla pivot point trading strategy is a technique that has an astounding accuracy in both regards, with particularly reliable performance for day-trading equities. Camarilla pivot points were discovered in 1989 by Nick Scott, a successful bond trader. The basic thesis for this strategy is a common one: That price, as most time series, has a tendency to revert to its mean, right up until the point it doesn’t.
As compared to classic pivots where traders look for Resistance 1 and Support 1 levels, the most important levels for the Camarilla pivot point variation are the third and fourth levels. Examples of each level, along with what might be considered an appropriate trade action, are shown here:
|Resistance 4||1422.82||Long breakout|
|Resistance 3||1419.16||Go short|
|Support 3||1411.86||Go long|
|Support 4||1408.20||Short breakout|
Camarilla pivot point calculations are rather straightforward. We need to input the previous day’s open, high, low and close. The formulas for each resistance and support level are:
- R4 = Close + (High – Low) * 1.1/2
- R3 = Close + (High – Low) * 1.1/4
- R2 = Close + (High – Low) * 1.1/6
- R1 = Close + (High – Low) * 1.1/12
- S1 = Close – (High – Low) * 1.1/12
- S2 = Close – (High – Low) * 1.1/6
- S3 = Close – (High – Low) * 1.1/4
- S4 = Close – (High – Low) * 1.1/2
The calculation for further resistance and support levels varies from this norm. These levels can come into play during strong trend moves, so it’s important to understand how to identify them. For example, R5, R6, S5 and S6 are calculated as follows:
- R5 = R4 + 1.168 * (R4 – R3)
- R6 = (High/Low) * Close
- S5 = S4 – 1.168 * (S3 – S4)
- S6 = Close – (R6 – Close)