How Pivot Points Work

Pivot Points are used to predict potential turning points in the market. They consist of a central pivot point (P) and several support (S) and resistance ® levels. The central pivot point is the average of the high, low, and closing prices from the previous trading day. The support and resistance levels are calculated using the pivot point and the previous day’s high and low prices.

Calculation of Pivot Points

The basic formula for calculating Pivot Points is as follows:

1. Pivot Point (P):

P=("High" +"Low" +"Close" )/3

2. First Support (S1):

S1=(P×2)−High

3. Second Support (S2):

S2=P−(High−Low)

4. First Resistance (R1):

R1=(P×2)−Low

5. Second Resistance (R2):

R2=P+(High−Low)

Interpretation of Pivot Points

1. Identifying Market Sentiment

Bullish Sentiment: If the price is trading above the pivot point, it indicates bullish sentiment.

Bearish Sentiment: If the price is trading below the pivot point, it indicates bearish sentiment.

Example: If a stock’s price is consistently trading above the pivot point, it suggests that the market sentiment is bullish, and traders may look for buying opportunities.

2. Support and Resistance Levels

Pivot Points provide multiple support and resistance levels that can act as potential entry and exit points.

Support Levels (S1, S2): These levels indicate where the price may find support and potentially reverse upwards.

Resistance Levels (R1, R2): These levels indicate where the price may face resistance and potentially reverse downwards.

Example: If a stock’s price approaches the first support level (S1) and then bounces back up, it may indicate a buying opportunity. Conversely, if the price approaches the first resistance level (R1) and then reverses downwards, it may indicate a selling opportunity.

Advanced Pivot Point Strategies

1. Pivot Point Breakouts

A breakout occurs when the price moves above a resistance level or below a support level. Traders can use pivot points to identify potential breakout opportunities.

Bullish Breakout: Occurs when the price moves above a resistance level (R1 or R2).

Bearish Breakout: Occurs when the price moves below a support level (S1 or S2).

Example: If a stock’s price breaks above the first resistance level (R1), it may signal a bullish breakout, and traders may look for buying opportunities.

2. Combining Pivot Points with Other Indicators

Pivot Points can be used in conjunction with other technical indicators, such as moving averages, RSI, and MACD, to enhance trading decisions.

Example: If the RSI indicates that a stock is oversold and the price is approaching a support level (S1), it may signal a strong buying opportunity.

3. Fibonacci Pivot Points

Fibonacci Pivot Points are an extension of traditional pivot points that incorporate Fibonacci retracement and extension levels. These levels are calculated by multiplying the previous day’s range (high - low) by Fibonacci ratios (23.6%, 38.2%, 61.8%) and adding or subtracting the result from the pivot point.

Example: If the previous day’s high was ₹150, the low was ₹140, and the close was ₹145, the pivot point (P) would be ₹145. The Fibonacci resistance levels (R1, R2, R3) and support levels (S1, S2, S3) will be calculated using the Fibonacci ratios.

Practical Application of Pivot Points

Identify Entry and Exit Points: Use pivot points to determine potential entry and exit points based on support and resistance levels.

Confirm Trends: Use pivot points in conjunction with other technical indicators to confirm the strength of a trend.

Monitor Market Sentiment: Use the central pivot point to gauge overall market sentiment and make informed trading decisions.

Spot Breakouts: Identify potential breakout opportunities by monitoring price movements around pivot points and support/resistance levels.

Use Fibonacci Pivot Points: Incorporate Fibonacci pivot points to add an extra layer of analysis and identify additional support and resistance levels.

Conclusion

Pivot Points are a valuable tool in technical analysis that helps traders identify potential support and resistance levels, monitor market sentiment, and make informed trading decisions. By incorporating pivot points into your trading strategy, you can improve your overall trading performance. Remember, while pivot points are powerful tools, they should be used in conjunction with other forms of analysis and risk management to achieve the best results.