Charting University » Pivot Points
What are Pivot Points?
A Pivot Point or Floor Pivot, is the price at which the direction of price movement changes. It is calculated using data from the previous trading day by looking at the high, low, and close (see formula below). These calculations point out support and resistance levels. Pivot points are used by professional traders and market makers as areas where direction of price movement, or trend, can possibly change.
Pivot points are especially useful to short term traders who look to take advantage of smaller price movements. Pivot points can be also be used for breakout trades as a way to recognize key levels that need to be broken for a move to be classified as a real breakout. One of the most successful way to use pivot points is through range bound trades. This method identifies reversal points once a direction is taken out of the range. Most charting software programs offer a Pivot Points selection to add to your charts.
There are several books available that cover the topic at the Trader's Bookstore. I am only going to briefly cover Pivot Points in this article.
Using Pivots as Trade set-ups
Support and resistance validity at the pivot levels is determined by the number of times the price bounces off the pivot level. The more times price touches a pivot level then reverses, the stronger the level is. Pivoting simply means reaching a support or resistance level and then reversing. This adds then to the strength of the direction that is eventually taken away from the given area.
In theory, "long trading positions" would be placed to buy as a pivot area is tested as support, with a tight protective stop-loss order just below the pivot support level.
Again, in theory, "short trading positions" should be placed to sell as a pivot area is tested as resistance, with a tight protective stop-loss order just above the pivot resistance level.
If price keeps moving higher above the resistance level, this would be considered an "upside breakout”. If you were short here, you would get stopped out following the plan mentioned above.
If you then believe that this new breakout move has good follow through buying strength, you can reenter with a long position. You would then place your protective stop just below the former resistance pivot level that you had originally shorted. This level is now acting as support.
The other play would be to be patient and see if this level is tested as support, and then to buy there. The stop-loss would be just below the pivot level.Only when price reaches the pivot point will you be able to determine whether to go long or short, and set your profit targets and stop-losses. Generally, if price is above the pivot - it’s considered bullish, and if they are below - it’s considered bearish.
The simplicity of pivot points definitely makes them a useful tool to add to your trading arsenal. They allow you to see possible areas that are likely to cause price movement. You’ll become more in sync to market movements and make better trading decisions. Learn to use pivot points along with other technical analysis tools such Candlestick Patterns, Moving Average lines, MACD Crossovers, Stochastics, or whatever you currently use. The greater the confirmations that you have, the greater your probability of success!
Summary
Pivot Points are particularly important to consider, if for no other reason, because so many traders are watching them. They are also "real time" calculations, not lagging, because they have been calculated in advance. Finally, they are very simple to use once you set them up on your charts.
In the real world, pivot points are not perfect when used alone. Price tends to dance around these pivot area and it can be difficult to select early direction. You must be very selective and create a pivot point trading strategy that you intend to strictly follow.
Floor Pivot Points Calculations are really quite simple - if you understand the math. There are several versions and I have listed two of the most popular below. Again however, many broker and charting platforms have these formulas available for your use without any need for programming on your part.
Basic formula:
- Pivot (P) = (H + L + C) / 3
- Resistance (R1) = (2 X P) - L
- R2 = P + H - L
- R3 = H + 2 X (P - L)
- Support (S1) = (2 X P) - H
- S2 = P - H + L
- S3 = L - 2 X (H - P)
Weight being given to the Closing Price of the previous session:
- Pivot (P) = (H + L + 2 X C) / 4
- Resistance (R1) = (2 X P) - L
- R2 = P + H - L
- Support (S1) = (2 X P) - H
- S2 = P - H + L
Camarilla Pivot Points calculation:
- R4 = C + RANGE * 1.1/2
- R3 = C + RANGE * 1.1/4
- R2 = C + RANGE * 1.1/6
- R1 = C + RANGE * 1.1/12
- PP = (HIGH + LOW + CLOSE) / 3
- S1 = C - RANGE * 1.1/12
- S2 = C - RANGE * 1.1/6
- S3 = C - RANGE * 1.1/4
- S4 = C - RANGE * 1.1/2
R1 through R4 are Resistance levels 1 to 4; PP is the Pivot Point; S1 through S4 are Support levels 1 to 4; RANGE is the High minus the Low for the given time frame. This formula is generally used on a Daily timed chart.