Traders use pivot points on the stock and commodity exchanges. They are calculated based on the high, low and closing prices of previous trading sessions, and are used to predict support and resistance levels in the current or next session. Traders can use these support and resistance levels to determine entry and exit points for both losses and profit taking.
How to calculate pivot points
There are several different methods for calculating pivot points, the most common of which is the five-point system. This system uses the high, low, and close of the previous day, along with two support levels and two resistance levels (for a total of five price points), to derive a pivot point. The equations are as follows:
Formula for calculating standard Pivot Points:
PP = (High + Low + Close)/3
S1 = (PP * 2) – High
S2 = PP – (High – Low)
S3 = Low – 2(High – PP)
R1 = (PP * 2) – Low
R2 = PP + (High – Low)
R3 = High + 2(PP – Low)
The above is the formula for calculating the standard pivot points and uses the high, low, and close prices from the previous trading period. There are other variations of the pivot points used by investors, but they all derive support and resistance lines that are sought in search of trading opportunities.
Reading Pivot Points
The interpretation of the pivot points is very simple. PP provides a trend bais prices above PP imply an upward bias while prices below PP denote a bearish bias. The support and resistance lines provide definite areas where traders will be watching the price action objectively.
This means that lines can provide traders with entry and exit points for trades. Pivot points are quite accurate and relevant because they use the price action from the previous period to forecast the likely behavior of the current price.
- A pivot point is an indicator of technical analysis, or calculations, used to determine the general trend of the market in different periods of time.
- The pivot point itself is simply the average of the high, low, and closing prices of the previous trading day.
- The following day, trading above the pivot point is believed to indicate continued bullish sentiment, while trading below the pivot point indicates the bearish sentiment.
- Here we will go over how to calculate pivot point levels and use them in practice.