To really understand where the most vital daily support and resistance levels are placed, it is necessary to infuse the volume behind every trade into a set of equations to estimate the daily volume-weighted average price and standard deviation levels. Naturally, it will be a bit difficult to get reliable volume data for real time analysis so we might be better off focusing mainly on price action.
For a long time, floor traders and market traders have achieved this by calculating a set of pivot point support and resistance level where price can be expected to vary. Somehow, it is not crucial to know exactly where these support and resistance levels are but instead, the floor traders and market traders know where they are.
For instance, if the floor traders are targeting money management stops, what price levels do you think they will try? Obviously the pivot point support and resistance levels are the prices where most stops are fixed since everyone knows where these trading limits usually are.
The central pivot point (CPP) is the balanced point around which trading is expected to take place. The estimation for tomorrow’s CPP is just the average of today’s high, low and close. Whenever prices move further away from the CPP, there are areas of support and resistance that determine the expected value area of the market. Since these areas are known, penetration and market moves outside of these support and resistance levels introduce new players to the market who infuse more momentum to the buying or selling pressure.
In the expressions below, C [1] is yesterday’s closing price, H [1] is yesterday’s high and L [1] is yesterday’s low. The central pivot point for today and its support and resistance levels are shown below:
Central pivot point P = (H [1] + L [1] + C [1]) / 3
First resistance R1 = (2*P) – L [1]
First support S1 = (2*P) – H [1]
Second resistance R2 = P + (R1 – S1)
Second support S2 = P – (R1 – S1)
There are variants hat estimate the pivot point in a different manner. One of them replaces yesterday’s close with today’s open and the other averages both yesterday’s close and todays open with yesterday’s close and open. When you carry out a surface comparison of the data, the original method seems to be more precise.
Generally, I look at stocks before the open to decide the current momentum for the stock. I will take into account a trade in that stock if the recent momentum of the stock, the current market momentum are aligned in the same direction.
I like to capture the stock just after it passes through the pivot point.
Additionally, to determine where the place stops, I employ the pivot/support/resistance to reduce the possibility of entering into trades at false tops and bottoms. I also implement the support resistance levels to calculate what the potential profit might be thus keeping me out of trades with little potential.