Pivot points are a tool that traders use to determine price levels of technical significance on intraday charts. A pivot point can help to identify a potential price reversal, which traders can then use — often in tandem with other technical indicators — as a cue to buy or sell.
When used alongside other common technical indicators, identifying pivot points can be part of an effective trading strategy. Pivot points are regarded as being important indicators for day traders.
What Is a Pivot Point?
Pivot points are predictive indicators that average the high, low, and closing price from the previous period to define future support levels. These pivot points can help inform a decision to buy or sell stocks.
Analysts consider the main pivot point to be the most important. This point indicates the price at which bullish and bearish forces tend to flip to one side or the other — that is, the price where sentiment tends to pivot from. When prices rise above the pivot point, this could be considered bullish; prices falling below the pivot point could be considered bearish.
Pivot points got their start during the time when traders gathered on the floor of stock exchanges. Calculating a pivot point using yesterday’s data gave these traders a price level to watch for throughout the day. Pivot point calculations are considered leading indicators.
Today, traders around the world use pivot points, particularly in the forex and equity markets.
Types of Pivot Points
There are at least four types of pivot points, including the standard ones. Their variations make some changes or additions to the basic pivot-point calculations to bring additional insight to the price action.
Standard Pivot Points
These are the most basic pivot points. Standard pivot points begin with a base point, which is the average of the high, low, and closing prices from a previous trading period.
Fibonacci Pivot Points
Fibonacci projections — named after a mathematical sequence found in nature — connect any two points a trader might see as important. The percentage levels that follow represent potential areas of a trend change. Most commonly, these percentage levels are 23.6%, 38.2%, 50.0%, 61.8%, and 78.6%. Technical analysts believe that when an asset falls to one of these levels, the price might stall or reverse.
Technical traders love using Fibonacci projection levels in some form or another. These work well in conjunction with pivot points because both aim to identify levels of support and resistance in an asset’s price.
Woodie’s Pivot Point
The Woodie’s pivot point places a greater emphasis on the closing price of a security. The calculation varies only slightly from the standard formula for pivot points.
Demark Pivot Points
Demark points create a different relationship between the open and close price points, using the numeral X to calculate support and resistance, and to emphasize recent price action. This pivot point was introduced by a trader named Tom Demark.
Pivot Points Calculations
The PP is vital for the pivot point formula as a whole. It’s essential that traders to exercise caution when calculating the pivot-point level; because if this calculation is done incorrectly, the other levels will not be accurate.
The formula for calculating the PP is:
To make the calculations for pivot points, it’s necessary to have a chart from the previous trading day. This is where you can get the values for the daily low, daily high, and closing prices. The resulting calculations are only relevant for the current day.
All the formulas for R1-R3 and S1-S3 include the basic PP level value. Once the PP has been calculated, you can move on to calculating R1, R2, S1, and S2:
R2 = PP + (Daily High – Daily Low)
S1 = (PP x 2) – Daily High
S2 = PP – (Daily High – Daily Low)
At this point, there are only two more levels to calculate: R3 and S3:
S3 = Daily Low – 2x (Daily High – PP)
How Are Weekly Pivot Points Calculated?
Pivot points are most commonly used for intraday charting. But you can chart the same data for a week, if you needed to. You just use the values from the prior week, instead of day, as the basis for calculations that would apply to the current week.
How Does a Trader Read Pivot Points?
A trader might read a pivot point as they would any other level of support or resistance. Traders generally believe that when prices break out beyond a support or resistance level, there’s a good chance that the trend will continue for some time.
• When prices fall beneath support, this could indicate bearish sentiment, and the decline could continue.
• When prices rise above resistance, this could indicate bullish sentiment, and the rise could continue.
• Pivot points can also be used to draw trend lines in attempts to recognize bigger technical patterns.
What Are Resistance and Support Levels in Pivot Points?
The numerals R1, R2, R3 and S1, S2, S3 refer to the resistance (R) and support (S) levels used to calculate pivot points. These six numbers combined with the basic pivot-point (PP) level form the seven metrics needed to determine pivot points.
• Resistance 1 (R1): First pivot level above the PP
• Resistance 2 (R2): First pivot level above R1, or second pivot level above PP
• Resistance 3 (R3): First pivot level above R2, or third pivot level above the PP
• Support 1 (S1): First pivot level below the PP
• Support 2 (S2): First pivot level below the PP, or the second below S1
• Support 3 (S3): First pivot level below the PP, or the third below S2
Which Pivot Points Are Best for Intraday Trading?
Because technical analysis has a large subjective component to it, traders will likely have their own interpretations of which pivot points are most important for intraday trading.
While some traders are fond of Fibonacci pivot points, others may prefer different points. There are communities online, like TradingView , where traders gather to discuss ideas like these.
The Takeaway
The pivot-point indicator is a key tool in technical stock analysis. This pricing technique is best used along with other indicators on short, intraday trading time frames. This indicator is thought to render a good estimate as to where prices could “pivot” in one direction or another.
As we discussed above, there are at least four different types of pivot points, including the standard ones. Some traders have their own interpretations about which pivot points are most useful for intraday trading, so they might choose to use the non-standard pivot points.
Each kind of pivot point brings its own set of variables, which can emphasize different aspects of a pricing scheme. Pivot points also may be used together to form a potentially successful trading strategy.
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