Pivot points are horizontal support and resistance lines
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 are prices at which traders enter or exit the markets.
They make strong levels of support and resistance because many traders, as well as financial institutions and banks, use them.
Before computers and charts became a key tool that traders use so effectively, floor traders determined key buying and selling 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 any time period can 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 that market sentiment is 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 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.
Calculating pivot points
Where the calculations state a price, it is referring to the price of the previous period, for example, the closing price is the previous day’s closing price.
Main pivot/Pivot point
Pivot point = (Highest price + Lowest price + Closing price) / 3
The first resistance level R1
R1 = (Pivot point *2) – Lowest price
The second resistance level R2
R2 = Pivot point + (Highest price – Lowest price)
The first support level S1
S1 = (Pivot point*2) – The highest price
The second support level S2
S2 = Pivot point – (Highest price – Lowest price)
Mid-pivots are simply halfway between the main pivot points. The calculations for mid-pivots are as follows:
M3 = (R1+PP)/2
M4 = (R2+R1)/2
Trading platforms have tools to calculate pivot points
It is important to note that there are many charting packages that provide these calculations automatically and others, such as MetaTrader 4, have the ability to install customised pivot point calculators. However, it is still useful to know the calculations in case you ever need them.
Different closing times will affect the calculations
Different markets have different closing prices that will affect the calculations.
The forex market, for example, is open for 24 hours and so the closing price is not easy to identify.
In contrast, the stock exchange has a clearly defined closing time and so the closing price is easily determined. However, with the forex market, there are no open and closing times during the week for the market as a whole. You must, therefore, choose which particular trading session you wish to use for the closing price.
The following is a list of the most common closing times for the major markets
- Stock traders use the settlement price from the close of the business day at 16:00 pm EST.
- Futures traders in the E-mini S&P, NASDAQ, and Russell contracts use the close of 15:15 CT. The CBOT Mini Dow contract uses 16:00 CT.
- Forex traders mostly use either 16:00 EST for New York bank settlements close or London midnight for the closing price.
Calculating weekly and monthly pivots
- For weekly calculations, take the open from Sunday night’s session and use the close on Friday.
- For the month, take the open from the first day of the month and use the last day for the close.
So far, you have learned that ...
- ... pivot points are horizontal support and resistance lines.
- ... they can be used in the same way as normal support and resistance levels.
- ... the main pivot is calculated using the previous period’s high, low and close price.
- ... each corresponding pivot point is calculated from the main pivot point.
- ... pivot points that are above the main pivot are resistance pivots and are labels as R1, R2 etc.
- ... pivot points that are below the main pivot are support lines and are labelled as S1, S2 etc.
- ... if the price is above the main pivot point, the market sentiment is generally up and if the price is below the main pivot point then the market sentiment is generally down.
- ... different markets have different closing times that affect the calculations. This means that you should be aware of the closing times of the markets you are trading in.