Pivot Point

Pivot Point: Definition and Purpose

Pivot points (PPs) are technical analysis levels calculated from the previous trading period’s high, low, and close. They provide objective support and resistance reference points that help traders identify market sentiment, potential reversals, breakouts, and trend confirmation.

Key ideas:
* The central pivot point (P) is the primary reference level.
* Support (S1, S2) and resistance (R1, R2) levels are derived from P.
* Price trading above P generally suggests bullish bias; below P suggests bearish bias.

Formulas

Let High, Low, and Close be the previous period’s values.

P = (High + Low + Close) / 3
R1 = (P × 2) − Low
R2 = P + (High − Low)
S1 = (P × 2) − High
S2 = P − (High − Low)

Definitions:
* High — highest price of the prior trading period
Low — lowest price of the prior trading period
Close — closing price of the prior trading period

Step-by-Step Calculation

1. Gather prior-period data: High (H), Low (L), Close (C).
2. Calculate the central pivot point: P = (H + L + C) / 3.
3. Compute support and resistance levels using the formulas above.
4. Plot P, R1, R2, S1, S2 on your chart; many platforms calculate these automatically.

S2 and R2 represent deeper zones where stronger price reactions may occur.

How Traders Use Pivot Points

Pivot points are applied to guide entries, exits, and bias:
* Trend identification — opening and trading above P suggests bullish sentiment; below P suggests bearish sentiment.
Support/resistance — P, S1/S2, and R1/R2 act as predefined barriers for possible bounces or rejections.
Breakouts — a clear break above resistance or below support can signal momentum continuation.
Reversals — failed breakouts or rejections at pivot levels can indicate reversals.
Trade management — stops and profit targets are often placed using pivot levels (e.g., stop above R1, target S2).

Combining Pivot Points With Other Indicators

Using pivot points with additional tools increases reliability:
* Moving averages — confirm trend direction alongside pivot bias.
Volume — validates strength of moves through pivot levels and reduces false breakouts.
Momentum oscillators (RSI, stochastic) — help time entries by identifying overbought/oversold conditions.
* Fibonacci retracements — alignment with pivot levels strengthens reversal probabilities.

Advantages

• Simple to calculate and use.
• Provide objective, predefined support and resistance levels.
• Offer confluence when combined with other indicators.
• Quick way to gauge market sentiment and set entries/exits.

Limitations and Considerations

• Based on past data; may not reflect sudden market changes.
• More effective in range-bound markets; less reliable in strong trending environments where levels are easily pierced.
• Prone to false breakouts and whipsaws during high volatility.
• Static for the chosen period — they do not adapt intraperiod unless recalculated.

Use pivot points together with price action and other indicators for stronger validation and risk management.

Practical Example

A day trader analyzing USD/JPY on an hourly chart observes:
* Price trading below the weekly pivot (bearish bias).
A bearish 50-SMA/200-SMA crossover and a bearish MACD crossover for confirmation.
Enters a short after confluence, sets a stop just above R1, and targets S2.
Price initially tests S1, then breaks lower and eventually reaches S2, hitting the profit target — an example of using pivot points with trend and momentum confirmation.

Bottom Line

Pivot points are a straightforward, objective tool for identifying support and resistance and assessing market bias. They are most effective when combined with other technical indicators (moving averages, volume, oscillators, Fibonacci) and sound risk management to reduce false signals and improve trade validation.