Support and Resistance – Pivot Analysis
What is Support and Resistance？
The purpose of support and resistance levels is to identify favorable entry and exit points.
There are multiple trading strategies that incorporate support and resistance levels. Additionally, there are multiple support and resistance strategies, the most common being the use of pivot levels and their associated major support and resistance levels that are based on a time periods pivot level.
When trading, it is beneficial to use more common strategies as these will tend to be followed by a greater number of traders.
Support levels refer to price levels below which an asset does not drop for an extended length of time.
At support levels, buyers enter into long positions thus delivering support and preventing further downside.
It is important to note, however, that there will be multiple support strategies. These include the use of the most recent lows as an example and Fibonaccis. Pivots and major support levels are the most commonly used levels.
Once a support level has been breached, the support level becomes a resistance level.
Similarly, resistance levels are price levels at which sellers will look to exit an asset or enter into a short position.
Here, resistance levels are calculated for time intervals by using the highs and lows of the previous time interval. In the case of using major resistance levels, traders base their resistance levels on the pivot level for a specified time interval, t.
Other resistance levels commonly used include daily, weekly, monthly, yearly, and all-time highs and Fibonaccis.
Once a resistance level has been broken, the resistance level becomes a support level.
How to draw support and resistance
Analysts and traders calculate the pivot and the major support and resistance levels for multiple time periods. These can be as short as hourly and as long as monthly.
Once you have calculated the pivot and major support and resistance levels, traders and analysts will then plot these on charts to assist in their trading decisions as shown in the chart below.
Calculating Pivot Levels
A pivot level is derived by calculating the average of the high, the low, and the closing price of a time interval, t.
Looking at a 1-hour time interval for the chart below, we would take the average of the day high $55,329, the day low $53,711, and the closing price $54,791 to obtain the next days pivot level. Here the pivot level would be $54,610.
Calculating Support Levels
Once you have calculated the pivot level, the major support levels, these being S1, S2, and S3 can be calculated. In the example below, using an hourly chart, a days pivot and major support levels can be calculated.
First Major Support Level: 2 x Pivot / the previous time interval high. In the example above, this would be (2 x $54,610) / 55,329 = $53,892.
Traders would be looking at the first major support level as an entry price.
Second Major Support level: S2 = Pivot – (Day high – Day low).
In the example above, this would be $54,610 – ($55,329 – $53,711) = $52,992.
Traders would be looking at the second major support level as an entry price in the event of an extended reversal.
Third Major Support level: S3 = S2 – (Day high – Day low).
In the example above, this would be $52,992 – ($55,329 – $53,711) = $51,374.
Traders would be looking at the third major support level as an entry price in the event of a market sell-off.
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