Pivot Points

In trading, the pivot point is a tool used in technical analysis to determine key support and resistance levels.

This is done by calculating the average prices of the high, the low and the close of the preceding trading period, often over a 24-hour period.

When using pivot points, a trader typically observes price action related to these pivot levels.

Thus, if price action occurs above the pivot point, the market is considered as bullish for that period, and if price action occurs below the pivot point, the market is considered bearish for that period.

Although the main pivot point is the most important line, traders utilize surround support and resistance levels derived from the main pivot, called Support 1, Support 2, Support 3 (shortened to S1, S2, S3), and Resistance 1, Resistance 2, Resistance 3 (R1, R2, R3).

These additional levels are calculated by subtracting or adding price differences from the prior trading ranges.

Different Types of Pivot Points

For example, on a daily chart, the S1 and R1 levels are simply determined by using the difference of the range between the main center pivot and the high and low of the previous day.

S2 and R2 are determined by using the entire price difference between the high and low prices of the previous day.

In the example of an up-trending market, the pivot point and the resistance levels may constitute a ceiling level in price above which the uptrend is no longer sustainable and a reversal may occur.

By extension, in a declining market, a pivot point and the support levels may represent a low price level of stability or a resistance to further decline.

Even though pivots points are a useful technical tool, they shouldn’t be solely relied upon, and traders are advised to utilize additional techniques for corroboration and confidence.