A pivot point is a form of a technical analysis indicator. It is used to the trend of markets over various time periods. A pivot point is the average of the average of the trading period’s high, low and closing price. The typical trading period is defined as the previous trading day.
Trading levels in the current time period represent a bullish sentiment if they are trading above the pivot points from the previous day, or a bearish sentiment if trading below.
Traders can also use pivot points to calculate support-resistance levels, as well as give traders a more macro look on price trends over a period, by eliminating minute market movements.
How Traders Calculate Pivot Points:
With developed technologies, most brokers have a feature of automatic pivot point generation. However, it is also helpful to understand how to generate these points by hand.
To begin, after the market closes, find the high, low, and close for the trading day. Then take the mean of that dataset. Mark this mean with a line across the chart labeled point ‘P’. Once the point is calculated, traders can calculate the subsequent support and resistance levels.
Four key assumptions about Pivot Points:
- When the price of a security is trading above the pivot point, it indicates that the market sentiment for the day is bullish.
- When the price of a security is trading below the pivot point, it indicates that the market sentiment for the day is bearish.
- Pivot points show two support levels and two resistance levels as well. These are often labeled S1 and S2, and R1 and R2.
- Support and resistance levels generated from the pivot points help indicate to traders potential reversals, or reaffirm their idea about market movements.
Pivot points are helpful technical indicators to day traders because they are static points based on previous trading data, to allow traders to see larger price movements without the noise of intraday fluctuations. They are a good tool, and it can be helpful to add these indicators to one’s trading arsenal.