Pivot Point

About the Pivot Point

The pivot point is a price based indicator that is used in technical analysis to predict a possible price movement in the next trading session. Pivot Point calculations are simple. It is an average of High, Low and Closing prices from the previous trading period.

As a rule, Pivot Point is used to define possible support and resistance levels for one session only by using the prior trading session's High, Low and Close quotes. However, some analysts on longer timeframes (1-year and longer views) may use weekly and monthly quotes to define possible support and resistance levels for the coming week or month.

The Pivot Point, Pivot Support and Resistance level calculations are simple:

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

Resistance #1 = 2 x (Pivot Point) - Low
Support #1 = 2 x (Pivot Point) - High

Resistance #2 = (Pivot Point) + (High - Low)
Support #2 = (Pivot Point) - (High - Low)

Resistance #3 = (Pivot Point) + 2 x (High - Low)
Support #3 = (Pivot Point) - 2 x (High - Low)

In technical analysis, Pivot Point is used as a leading indicator (predicts a possible future trend) to define the current mood. As a rule, when sentiment is uncertain, prices fluctuate around the pivot point. Trading below or above the pivot point indicates Bearish or Bullish sentiment respectively with the possibility of a further decline or advance.

As a rule, Support and Resistance levels are used in trading systems as exit (not entry) signals. For example, if the price of a stock is traded above the Pivot Point and below the First Resistance level, technical analysis says that the odds are good that the price will hit the First Resistance level. However, as soon as the price hits this level, the odds become high for a retracement down. Furthermore, the resistance level can be used as a signal to close a trade.

The basic concept behind Pivot Point and its Support and Resistance levels is that the security's (stock's) price moves from level to level, while the trend becomes weak and predisposed to change.