A pivot point is a place on the chart where the current short or longer-term trend in price action changes direction. Pivot points are used to define support and resistance levels, entry and exit points, and trend. Our charting software uses mathematical calculations to identify these important points and help you be more aware of these areas of interest.
Pivot Points in Practice
We provide two options within our charting software for the purpose of identifying pivot points. Pivots (R1/R2/R3, S1/S2/S3) is more useful in identifying important pivot points on intraday charts. Pivots (Swing Highs/Lows) is more useful in identifying important pivot points on daily, weekly and monthly charts.
Pivots (Swing Highs/Lows)
Pivot points identified at the bottom of any recent price action would be considered entry points and support levels. Pivot points near the top of any recent price action would be considered potential exit points and resistance levels. It is common for investors to use stop orders around these prices in order to protect profits or restrict loss.
Pivots (R1/R2/R3, S1/S2/S3)
When discussing the terminology on your chart, ‘P' represents the pivot point. ‘R1' is the first resistance level, ‘R2' the second resistance level, and ‘R3' the third resistance level. ‘S1' is the first support level, ‘S2' the second support level, and ‘S3' the third support level.
These levels are determined using the following formulas:
P (pivot point) = (high previous bar + low previous bar + close previous bar) / 3
R1 (first resistance) = 2 X P – Low previous bar
S1 (first support) = 2 X P – High previous bar
R2 (second resistance) = (P - S1) + R1
S2 (second support) = P – (R1 – S1)
R3 (third resistance) = R1 + (High previous bar – Low previous bar)
S3 (third support) = S1 – (High previous bar – Low previous bar)
The formulas show that these various levels are calculated from the previous bar's high, low and close. In fact, the beginning pivot point (P) is just an average of the high, low and close.
There is some disagreement about the validity of mathematically-derived support and resistance levels as opposed to actual price levels where previous supply and demand were established in a market. Nevertheless, this indicator is somewhat popular with short-term traders, and the formula shown above is simple and straightforward.
The various support and resistance levels are plotted as horizontal lines on any timeframe chart chosen by the user. Pivot points can be used on daily, weekly, monthly charts, and the calculations on the daily charts can be carried over to any intraday timeframe. On intraday charts, the lines continue to extend to the right as the chart develops and the trading day progresses, providing a frame of reference for the trader throughout the trading session.
Read Next: Price Rate of Change (ROC)
The analytical tools described in this article are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or endorsement of any specific investment, tool or strategy. The choice to engage in a specific investment, tool or strategy should be based solely on your research and evaluation of risks involved, your financial circumstances and investment objectives. Securities are subject to market fluctuation and may lose value. Market volatility, volume, and system availability may impact account access and trade execution.