Equity markets will move towards significant levels of support and resistance that can lead to large movements in any direction. Pivot points help you find those levels.

Support and resistance levels often identify price points where important movements occur, but how do you identify support and resistance? Merchants use many methods to find these key areas, including areas of past interest, simple mathematical equations and sophisticated models of computerized commerce. Often, simple, objective and easy-to-calculate tools are better because they tend to work consistently over time and work in a wide variety of markets and terms. An indicator that meets these criteria is Woodie's pivot point. We will discuss how to calculate, interpret and use this technical tool, focusing on daily trade and oscillating commerce.

The pivot point of the Woodie is the level at which the market direction changes for the day. Woodie pivot points are used to determine the levels of negotiation at which the trend tends to change direction and target possible support and resistance. They are designed to be trend prediction indicators instead of lagging indicators.

In some ways, pivot points can be a self-fulfilling prophecy. Many traders follow them, which makes the market react to these levels.

Calculation
Nowadays, in the era of instant calculations, it may seem strange to talk about manual calculation. It is important, when possible, to understand the mathematics behind its indicators.

To calculate Woodie's pivots, use the formulas below. R1-R3 denotes resistance levels. PP refers to the pivot point. S1-S3 are support levels. The support and resistance levels that are calculated from the formulas indicate the possible negotiation ranges for the next negotiation session.

To calculate the pivot level, we need three prices, which are:

H = High price of the previous day
L = Low price of the previous day
O = Opening price of the current day

The formula for the pivot point is:

PP = (H + L + (O * 2)) / 4

Support and resistance levels are calculated. The first support and resistance levels are calculated using the difference between the pivot point and the maximum and minimum prices of the previous day:

R1 = (2 * PP) - L
S1 = (2 * PP) - H

The second support and resistance levels are based on the width of the trading range (high - low) and are calculated as:

R2 = PP + (H - L)
S2 = PP - (H - L)

The third levels of support and resistance are calculated as:

R3 = H + 2 * (PP - L)
S3 = L - 2 * (H - PP)

These prices are usually taken from the daily chart of a stock or futures contract, but the pivot point can also be calculated using the information in the hourly charts. Most operators prefer to take the pivots, as well as the support and resistance levels, of the daily charts and then apply them to the intraday charts (for example, every hour, every 30 minutes or every 15 minutes). If a pivot point is calculated using price information for a shorter period of time, this tends to reduce its accuracy and importance.

Analysis
The most important level is the pivot level itself, above or below where the price movement towards support and resistance levels will occur.

It is extremely rare for a stock index to reach its daily levels of R3 or S3. If a market or individual shares go up to R2 or sell up to S2, this often ends up being the maximum or minimum of the day. Knowing this will help calm your emotions and keep you on the right path to follow this system.

In the context of the application of this indicator, we consider the pivot point as the level of trend decision for a particular day. This allows us to derive three basic rules for operating with pivots:

If the market / share trades above the pivot point, then the bias for the day is long. Buy is advisable.
If the market / shares are traded below the pivot point, the bias of the day is short. Short selling would be the preferred strategy.
If the market opens the gap up or down, and trades near R2 / R3 or S2 / S3, it will exhibit a tendency to return to trading towards the pivot. Therefore, the general rule to follow is "avoid buying high or selling low."
If S1 or R1 is penetrated, these breakpoints will reverse their roles. That is, the first support (S1) becomes the new resistance (R1).
Commercial examples
We will demonstrate the pivot system with the price action of the S&P 500 on September 24, 2014, and show how it could have operated using this technique.

On September 23, the S&P 500 recorded the following:

High: 1995.41
Under: 1982.77
Closure: 1982.77

On September 24, the market opened in 1983.34. This gave us the following pivot levels:

PP: 1985.93
R1: 1989.09
R2: 1998.57
R3: 2001.73
S1: 1976.45
S2: 1973.29
S3: 1963.81

The “S&P levels” (below) illustrate how market action developed on September 24 in the context of pivot point analysis. The S&P 500 opened in 1983.34 and immediately began to fall. According to Woodie's pivot point strategy, we performed a long operation above the pivot in 1985.93, keeping a two-point stop loss in place.
The first objective for trade is R1 in 1989. At this level, an operator can reserve profits or protect the position by moving the stop loss to the point of equilibrium and falling behind the market. The second objective for trade is R2 in 1998. At this level, a trader must reserve the full benefit. The maximum reached by the S&P 500 on September 24 was 1999.79, just above R2.
Let's take another example of using pivot levels to operate on the short side of the market.

On September 5, 2014, Verizon Communications Inc. had the following data:

High: 50.03
Under: 49.56
Closure: 49.94

The following Monday, on September 8, the market opened to 49.87. This gives us the following levels:

PP: 49.83
R1: 50.11
R2: 50.3
R3: 50.58
S1: 49.64
S2: 49.36
S3: 49.17

The "communication breakdown" (below) shows the price action on September 8 with respect to pivot points. Verizon opened at 49.87. According to the pivot level system, we take a short operation below the pivot (49.83) with a stop loss at the provisional maximum of the day at this point (49.88).
The first objective for trade is S1 (49.64). At this level, an operator can reserve profits or follow the position with a stop loss initially transferred to the breakeven point, as we did with long trade. Similarly, the second objective is S2 (49.36). The minimum reached by Verizon on September 8 was 49.40, which is only 4 ¢ below the S2 target. Operators are advised to square all positions in this type of daily trading strategy.

Now let's look at an example that includes both a long and a short operation. On August 14, 2014, Apple had the following:

High: 97.57
Under: 96.80
Closure: 97.50

The opening on August 8 was 97.90, which gave us the following pivot values:

PP: 97.34
R1: 97.88
R2: 98.11
R3: 98.65
S1: 97.11
S2: 96.57
S3: 96.34

"Swing about" (below) includes Apple's five-minute chart on August 8.
It shows how we could trade on both sides of the market using pivot levels. Apple opened the gap at 97.50, which is above the pivot at 97.34. According to the pivot level system, we take a short operation when the market moves below the pivot, with a stop loss at the provisional maximum of the day of 97.90.

The first objective for trade is S1 (97.11). At this level, an operator can reserve earnings or track the position from the entry price. The second objective is S2 (96.57). As seen in the graph, the action could not move near this second objective and finally triggered the stop loss.

Now, when Apple starts operating above the pivot level, we can start a long operation at 97.40 with a stop loss of 97.00 and our first target is R1 at 97.88. The action finally reached this level in the last hour of trading, and we recorded our earnings.

Woodie pivot point levels are simple and accessible tools for daily traders that provide a reliable way to identify possible market tipping points. It is important to keep in mind that pivot points, like any indicator, are not infallible and are more effective when combined with other techniques, such as sails, oscillators and moving averages. In addition, despite the simplicity of this tool, it is important to practice using it widely before attempting to use it for real exchanges.