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Pivot Point

Pivot Point

A pivot point is a calculated price level based on the previous period's high, low, and close. It is used as a reference for potential support and resistance.

Pivot Points are technical analysis levels calculated from the previous period's high, low, and close prices. The central pivot point represents a neutral level, with support and resistance levels calculated above and below. Originally used by floor traders, pivot points provide potential reversal and breakout zones for intraday and swing trading.

Standard pivot point calculation:

Pivot Point (PP) = (Previous High + Previous Low + Previous Close) / 3

Resistance 1 (R1) = (2 × PP) - Previous Low
Support 1 (S1) = (2 × PP) - Previous High

Resistance 2 (R2) = PP + (Previous High - Previous Low)
Support 2 (S2) = PP - (Previous High - Previous Low)

Resistance 3 (R3) = Previous High + 2 × (PP - Previous Low)
Support 3 (S3) = Previous Low - 2 × (Previous High - PP)

Why pivot points matter:

  • Pre-calculated levels: Known before market opens
  • Support/resistance: Provide objective price levels to watch
  • Widely followed: Self-fulfilling due to widespread use
  • Trading framework: Structure for intraday trading decisions

Interpreting the central pivot:

  • Price above PP: Bullish bias for the session
  • Price below PP: Bearish bias for the session
  • Price at PP: Neutral; watching for direction

Trading applications:

  • Reversal zones: Watch for reversals at S1/S2 or R1/R2
  • Breakout levels: Breakouts through pivots signal momentum
  • Target setting: Use pivot levels as profit targets
  • Stop placement: Place stops beyond pivot levels

Pivot point variations:

  • Classic (Standard): Formula shown above
  • Fibonacci: Uses Fibonacci retracements for S/R
  • Woodie's: Gives more weight to closing price
  • Camarilla: Tighter levels; emphasises closing price

Timeframes:

  • Daily pivots: Based on previous day; most common
  • Weekly pivots: Based on previous week for swing trading
  • Monthly pivots: Based on previous month for longer-term

Limitations:

  • No trend context: Doesn't account for overall trend direction
  • Gap impact: Large gaps can make pivots less relevant
  • Self-fulfilling: Works partly because many traders watch same levels
  • Not predictive: Identifies levels but not what price will do there

Pivot points provide an objective framework for identifying potential support, resistance, and breakout levels. Their simplicity and widespread use make them valuable for intraday and short-term trading.