What Are Pivot Points?
Pivot points are horizontal support and resistance lines placed on a price chart. The prices that they are placed at are calculated from the previous periods’ price data. For example, daily pivot points use the data from the previous day. They are important because they areat which enter or exit the .
They make strong levels ofand because many traders, as well as financial institutions and , use them.
Before computers andbecame a key tool that traders use so effectively, floor traders determined key and levels using calculations based on the data from the previous trading day. Pivot points are still extensively used today and they are very useful in determining entry and exit points.
Although anycan be used to calculate them, daily and weekly pivot points are the most commonly used. Monthly pivot points are also common, although they are not used as much as daily or weekly.
The following chart shows you what they look like on a chart:
How To Use Pivot Points
An important aspect to know about pivot points is that each level can be used for support or resistance. For example, the level R1 will generally be a strong resistance level. However, if the price breaks through and comes back down to it, it will also be a strong support level.
If the price is below the main pivot point, it means thatis likely to be negative and if the price is above the main pivot point, it is likely to be positive.
As with all support and resistance levels, there is strength in numbers. The more pivots that line up, the greater the potential will be for price to react at those levels. So for example, if a weekly and a daily pivot point are at the same price level, this will make an even more substantial support or resistance level.
Types of Pivot Points
There are different types of pivot points that are calculated and they revolve around what is called the main pivot point or daily pivot, the point at which the market is said to “pivot” around. After the main pivot point has been calculated, this is then used to calculate the other corresponding pivots points.
The pivot points above the daily pivot are labelled as resistance pivots, notably R1, R2, etc. If they are below, they are support pivots, labelled S1, S2, etc.
They are mostly calculated using a 5-point-system, comprised of:
- The median pivot point (PP)
- Two resistance levels (R1) and (R2)
- Two support levels (S1) and (S2)
Pivot points that are between the pivot points are call mid-pivots. They are labelled differently. The mid-pivot between the S1 and S2 is labelled as M1, the mid-pivot between the S1 and the main pivot is M2 and so on.