A Pivot point is an indicator, which is used in technical analysis. It consists of the middle pivot, two support (S1 and S2), and two resistance levels (R1 and R2).
The Pivot point can determine the overall trend of the market and the key resistance and support levels based on the pivot point calculation. The price above the middle pivot indicates the bullish force, while the price below the middle pivot shows the strength of bears. Also, S1, S2, R1, and R2 may be used as take profit or stop-loss levels.
The pivot point indicator calculates levels automatically. However, if you are interested in the formula, here you are.
We will consider previous highs and lows, so you should know that there are daily, weekly, monthly and Fibonacci pivots. So highs and lows will be considered regarding the period.
At the beginning of the trading session, previous high, low and the closing price are considered to calculate a pivot point for the chosen period. The next step is to sum high, low and close prices and divide them by three. This is the price of the central pivot. Afterward, you can calculate support 1, support 2, resistance 1 and resistance 2.
Support 1 (S1) = (PP x 2) – Previous High;
Support 2 (S2) = PP – (Previous High – Previous Low);
Resistance 1 (R1) = (PP x 2) – Previous Low;
Resistance 2 (R2) = PP + (Previous High – Previous Low).
This is known as a traditional 5-point system
Daily pivots are used for intraday trading on M30 and shorter timeframes. They use the previous day’s high, low and closing price. The indicator updates every day.
Weekly pivot points are used for trading on H1, H4, and D1 charts. Here, the previous week’s high, low and closing price are required. They remain unchanged until the start of a new week.
Similarly, monthly pivots are recommended for trading on the weekly timeframe.
Pivot points are widely used in trading futures, commodities, stocks, and currency pairs. Unlike oscillators, these levels are static and give a trader some time to make their trading decisions in advance.
Pivot points may be used as a separate indicator or in combinations with others, such as Fibonacci retracements or moving averages.
2020-07-24 • Updated