Updated on March 11, 2023
A pivot point is a technical analysis indicator used to determine the overall trend of a market or security. It is calculated by taking the average of the high, low, and closing prices of a security over a certain period of time, such as a day or a week. This average price is then used as a base for determining the level of support and resistance for that security. Traders often use pivot points to identify entry and exit points for their trades, as well as to identify key levels of support and resistance that may indicate a change in the direction of the trend. Pivot points can be used in a variety of markets, including forex, stocks, and futures.
What is the formula to calculate pivot points?
The formula for calculating pivot points depends on the type of pivot point being used. There are several different types of pivot points, including,
Standard Pivot Point (PP) –
(Previous High + Previous Low + Previous Close) / 3
Support and Resistance levels –
Pivot Point (PP) = (Previous High + Previous Low + Previous Close) / 3
First level of support (S1) = (2 * PP) – Previous High
First level of resistance (R1) = (2 * PP) – Previous Low
Second level of support (S2) = PP – (R1 – S1)
Second level of resistance (R2) = PP + (R1 – S1)
What are pros and cons of using pivot points?
Pros of using pivot points in technical analysis:
Easy to calculate to determine key levels of support and resistance.
Provides a clear picture of market sentiment helping investors make informed trading decisions.
Usefulness in range-bound markets where prices oscillate between support and resistance levels.
Works in all time frames from intra-day to weekly or monthly charts, making it a versatile indicator for traders.
Cons of using pivot points in technical analysis:
Limited in trend-following markets as prices may move far beyond the calculated support and resistance levels.
The interpretation of pivot points can be subjective and depends on the individual trader’s analysis. This can lead to inconsistent results.
This should not be used as a standalone indicator and should be combined with other technical analysis tools for a complete market analysis.
Pivot points are based on past prices, which means they may not be accurate in rapidly changing or unpredictable markets.