Tim Olson
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2.8 KiB
2.8 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| Derives support and resistance levels from the previous day's pivot point and trades breakouts or reversals relative to these computed price levels. |
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Support and Resistance
Section: 3.14 | Asset Class: Stocks | Type: Technical Analysis
Overview
This strategy uses "support" (S) and "resistance" (R) levels computed from the previous day's high, low, and closing prices via a "pivot point" (center) C. The trader establishes or liquidates positions based on whether the current price crosses the center, reaches the resistance, or falls to the support level.
Construction / Signal
Using the previous day's high P_H, low P_L, and closing P_C prices:
Pivot point (center):
C = (P_H + P_L + P_C) / 3 (325)
Resistance level:
R = 2 * C - P_L (326)
Support level:
S = 2 * C - P_H (327)
Trading signal (P is the current price):
Signal = { Establish long position if P > C
{ Liquidate long position if P >= R
{ Establish short position if P < C
{ Liquidate short position if P <= S (328)
Entry / Exit Rules
- Long entry: Current price P crosses above the pivot center C.
- Long exit: Current price P reaches or exceeds the resistance level R (take profit at resistance).
- Short entry: Current price P crosses below the pivot center C.
- Short exit: Current price P falls to or below the support level S (take profit at support).
Key Parameters
- Price inputs: Previous day's High (P_H), Low (P_L), Close (P_C)
- Pivot definition: Standard:
C = (P_H + P_L + P_C) / 3(other definitions exist) - Holding period: Very short-term (intraday to 1 day); pivot levels are reset daily
Variations
- Open-price pivot: Some definitions use the current day's open price instead of the prior close P_C
- Higher/lower support-resistance levels: Extended pivot systems define multiple support/resistance levels (S2, S3, R2, R3)
- Breakout mode: Instead of reverting at S/R, treat a break through R as a new long entry (trend-following variant)
Notes
- Support and resistance levels are reset daily using the previous day's OHLC data.
- The strategy is primarily intraday or very short-term (daily bar).
- There is substantial literature on support/resistance strategies but academic evidence for profitability is mixed.
- Can be combined with volume confirmation: signals are more reliable when price breaks through S/R levels with increased volume.
- The pivot point methodology has many variants (using open price, weekly pivots, Fibonacci ratios, etc.).