Overview

A Pivot Point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over different time frames. The Pivot Point itself is simply the average of the high, low and closing prices from the previous trading day. On the subsequent day, trading above the Pivot Point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.

The Pivot Point is the basis for the indicator, but it also includes other support and resistance levels that are projected based on the pivot point calculation. All these levels help traders see where the price could experience support or resistance. Similarly, if the price moves through these levels it lets the trader know the price is trending in that direction.

KEY TAKEAWAYS

•    When the price of an asset is trading above the pivot point, it indicates the day is bullish or positive.

•    When the price of an asset is trading below the pivot point, it indicates the day is bearish or negative.

•    The indicator typically includes four additional levels: S1, S2, S3, R1, R2 and R3. These stand for support one and two, and resistance one and two.

•    Support and resistance one and two may cause reversals, but they may also be used to confirm the trend. For example, if the price is falling and moves below S1, it helps confirm the downtrend and indicate a possible continuation to S2.

Description

The Pivot Point indicator can be added to a chart, and the levels will automatically be calculated and shown. Here's how to calculate them yourself, keeping in mind that pivot points are predominantly used by day traders and are based on the high, low, and close from the prior trading day. If it is Wednesday morning, use the high, low, and close from Tuesday to create the pivot point levels for the Wednesday trading day.

The Formula for the Pivot Point Is:

PP = (H + L + C) / 3

Where:

H - Maximum of the previous period

L - The minimum of the previous period,

C - closing price of the previous period

For the intervals minutes, hours - the previous period = day, otherwise - the month.

First support S1 = 2 * PP - High;

The first resistance is R1 = 2 * PP - Low;

The second support is S2 = PP - (R1 - S1);

The second resistance is R2 = PP + (R1 - S1);

Third support S3 = Low - 2 * (High - PP);

Third resistance R3 = High + 2 * (PP - Low)