Pivot Points - An Introduction to Pivot Point Trading

Pivot Points Home - Pivot Point Calculator

Pivot points are used as a way of determining support and resistance on a price chart. They can be used for the stock and forex markets and are easy to calculate. You can work out today’s pivot points in a few seconds using our pivot point calculator or a few minutes with some simple calculations.

You can watch the video on this page, watch the high resolution version of Pivot Points - An Introduction to Pivot Point Trading or read the article which continues below.

Definition: A technical indicator calculated using a financial instrument’s high, low and close values. N.B. These values are usually taken from the previous day’s trading range.

Originally used by floor traders, this method of plotting areas of support and resistance has become very popular with retail traders. Pivot points are popular because they can be an extremely accurate technical tool. Once these points are plotted onto a price chart they can act as a guide for the price action for the day ahead.

Why are they known as ‘pivot’ points? Because they identify areas of support and resistance. Support and resistance are areas where major price movements can occur and they can determine market direction.

Pivot Points, How are They Different?
By their very nature most technical indicators are lagging. They use previous market data to try and assign a value to current conditions. However, pivot points use a previous trading periods price range to make a projection or a prediction of where price is likely to be.

How to Calculate Pivot Points
There are several ways to calculate pivot points, including Camarilla, DeMark and Woodies. The most common method, and the method used by our calculator, is known as the five-point system. (NB our pivot calculator has added two extra levels of support and resistance so it is actually a nine-point system).

The five points are represented by:

• R2 - Resistance 2, upper resistance for the extreme trading range
• R1 - Resistance 1, first resistance for the normal trading range
• P - Pivot Point, used to determine upward or downward momentum
• S1 - Support 1, first area of support for the normal trading range
• S2 - Support 2, lower support for the extreme trading range

Here are the points again with the relevant calculations:
R2 = P + (R1 – S1)
R1 = (P * 2) – L
P = (H + L + C) / 3
S1 = (P * 2) – H
S2 = P – (R1 – S1)

Where H = yesterday’s high, L = yesterday’s low and C = yesterday’s close.

A further modification for calculating the Pivot includes today’s Open (or O) price:
P = (O + (H + L + C)) / 4

Please note that O always represents the current trading period’s open while H, L and C all refer to the previous trading period.

The Pivot Point
The actual pivot point, or P in the calculations above, is regarded as the main area of support/ resistance. Significant breaks of this level are, in theory, the catalyst for strong price moves.

The direction in which the pivot point is broken can be used to determine the direction of a trend. So, if price breaks below the pivot this would indicate a short or bear trend. If price breaks above the pivot level then the bias is long (a bull trend).

Using the Pivot Point for Entries and Exits
If the pivot level can be used to determine the trend then it stands to reason that it can be used as a potential entry or exit level. For traders looking to enter the market, a break of the pivot level can serve as an entry marker, confirmation of trend direction if you like. Let us imagine that the pivot point for stock XYZ is at 45.90. The current price of stock XYZ is 46.32. Trader A expects that a price swing to the short side is about to develop. He or she may decide to place a stop order to go short at the pivot level of 45.90, this price serves as his or her confirmation that the down move has begun.

On the other hand, Trader B is long of stock XYZ. He or she expects that prices can move higher, but if the pivot level at 47.00 is broken it will represent a good opportunity to take profits as the up trend may be coming to an end. This trader may place a stop loss order at 47.00 to close out their position. In this example the pivot point has become an exit.

Trader B was right to set a protective stop at the Pivot Point. Notice how price breaks much lower once the pivot is broken. But Trader B's profits are safe.

R and S Levels and Zones
Depending on the trader, he or she can use the S1, S2, R1 and R2 levels as entry or exit strike prices as discussed above. Alternatively they may be more inclined to use them as ‘zones’.

A price zone would be, for example, between pivot levels R1 and R2. This area can be considered a resistance ‘zone’. The idea would be to look for shorting opportunities within this zone for the bears, or an opportunity to take profits if already long. Of course the opposite would be true for the zone between pivots S1 and S2.

The above method would be particularly attractive to reversal traders. On the other hand, trend or momentum traders can use the zones in a different fashion. There is a theory that if a support or resistance zone is broken with enough momentum or volume then it indicates a very strong trend is underway. In this case, if the zone between R1 and R2 is penetrated, and the R2 pivot is broken then a momentum trader would look to buy into this strength and go long. The momentum trader may have bought into a trend that could last for days. However, pivot points would need to be recalculated everyday using the most up to date data.

Conclusion
Like all technical indicators the use of pivot points is open to interpretation. Every trader has the opportunity to work with pivots in their unique way and the exciting thing is that they can be combined with any combination of technical tools.

The true challenge is being able to use this tool in a way that makes sense to the individual in question. The key here is to look for the relationship between price movement and pivot points rather than to look for the pivot points to tell you which direction the market is going to move.