What it means
Traders look for price levels where buying or selling pressure is likely to change. The pivot point is the central level, and it acts as a reference line: prices above it suggest buyers are in charge, while prices below suggest sellers have the upper hand.
It was first used by floor traders in futures markets who needed a quick way to plan the next day. Support levels are prices below the pivot where falling prices may stop, and resistance levels are prices above the pivot where rising prices may stall.
Most charts show two or three of each. Traders use them to place orders, set stop-loss levels (a price at which a losing trade is closed) and choose targets.
The calculation is simple and uses data from the previous day, week or month. Because the inputs are known in advance, every trader using the same formula sees the same levels.
Some argue that this shared knowledge helps the levels work, since many people act around them. There are several versions of the formula.
The standard version uses the high, low and close, while others, such as Fibonacci, Woodie and Camarilla pivots, change the weights or add ratios. Traders choose the version that suits their style, and results will differ between them.
Pivot points are used most in short-term trading of currencies, indices, commodities and shares. They are less common in long-term investing, where company earnings and cash flow matter more.
They also work best in markets with plenty of trading activity. Like all technical tools, pivot points are not guarantees.
Prices often move through the levels, especially when important news arrives, and a level that held yesterday may fail today. Sensible traders combine them with other information and limit the amount they risk on each trade.
In practice
Real-world examples.
Example
A currency trader calculates pivot levels each morning from the previous day's prices. When the euro trades above the pivot, she looks for chances to buy and aims for the first resistance level. If the price falls below the pivot, she stays out.
Example
A commodity trader uses pivot points to set stop-loss orders. He places a stop just below the first support level so that a normal dip does not close the trade. If the price breaks that level, he accepts the loss and exits.
Example
A day trader of technology shares sees the price stall at the second resistance level three times. She sells part of her position there and moves her stop to protect the rest. The shares later fall back to the pivot point.
Formula
Calculation
Pivot point (P) = (High + Low + Close) / 3
Resistance 1 (R1) = (2 x P) - Low
Support 1 (S1) = (2 x P) - High
Resistance 2 (R2) = P + (High - Low)
Support 2 (S2) = P - (High - Low)
A stock traded yesterday with a high of $54, a low of $48 and a close of $51. The pivot point is (54 + 48 + 51) / 3 = 153 / 3 = $51.
Resistance 1 is (2 x 51) - 48 = 102 - 48 = $54, and support 1 is (2 x 51) - 54 = 102 - 54 = $48. The range is 54 - 48 = $6, so resistance 2 is 51 + 6 = $57 and support 2 is 51 - 6 = $45.Case study
Seen in the real world.
Larchmont Trading is a fictional proprietary trading firm, and this case is illustrative. A junior trader there used pivot points to trade an index future that had a previous high of 5,040, a low of 4,980 and a close of 5,010.
He calculated the pivot at (5,040 + 4,980 + 5,010) / 3 = 15,030 / 3 = 5,010. Resistance 1 was (2 x 5,010) - 4,980 = 5,040, and support 1 was (2 x 5,010) - 5,040 = 4,980. He bought when the market held above 5,010 and set his stop at 4,980.
The market rose to 5,040 and paused, so he took his profit of 30 index points. His senior colleague reminded him that the tool gave no guarantee and that his risk limit was what protected him on days when it failed. The illustrative lesson is that pivot points structure decisions but do not predict outcomes.
Watch out
Common mistakes.
- Treating pivot levels as certain turning points, when prices often move through them.
- Mixing different formulas without realising that each gives different levels.
- Using the levels without a stop-loss or risk limit.
Questions
People also ask.
Which prices are needed to calculate a pivot point?
The high, low and closing prices of the previous period.
What time frame should I use?
Traders usually use the previous day for short-term trading and the previous week or month for longer trades.
Do pivot points work for company valuation?
No, they are a short-term price tool and say nothing about the value of a business.
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