Pivot Point

Pivot point is a technical indicator that reflects the price at which a financial market changes its direction during a trading day. These points are also used on a regular basis by traders to identify the resistance and support levels of financial securities, such as stocks, bonds, options, futures and currency pairs. The resistance level of a security is the price at which traders focus on selling the security, preventing the price from rising further. Meanwhile, the support level is the price at which investors find a security attractive enough to buy, resulting in an upward pressure on the price.

Interpreting Pivot Points

Pivot points are predictive in nature and specifically used by traders in the commodity futures and foreign exchange (forex) markets to capitalize on price reversals. Traders in the forex market mostly use these points to set up stop orders for their open positions.

The pivot point indicates the price levels at which the largest movement in a currency exchange occurs. Pivot points can be used to:

• Determine the overall market trend: If the exchange price of a currency pair declines below the pivot point, the market is said to be witnessing a bearish trend.
• Enter and exit markets: A trader can put a limit order for his open position if the price breaks a resistance level or set a stop loss when the price breaches a support level.

Who Uses Pivot Points

Pivot points are especially useful for:

• Short-term traders: These traders aim to close their positions at levels when market trends are expected to turn negative during a trading day and maximize their profits.
• Range-bound traders: These traders use pivot points to recognize the point of reversal of the market and carry out trading within this narrow range.
• Breakout traders: Pivot points are used by these traders to identify key levels, which when breached would indicate the market is witnessing a real deal breakout. These traders can then either ride the wave or sell after the breakout point to realize profits.

What does a Pivot Point indicate?

If the exchange price of a currency pair moves above a pivot point, it is said to indicate a new support level for the pair. Meanwhile, a decline in the exchange price below a pivot point is said to form a new resistance level.

Calculating Pivot Points

A pivot point can be calculated from the previous day’s high (H), low (L) and close (C) points.

Pivot point (P) = (H + L + C)/3

First area of resistance (R1) = 2P – L

First area of support (S1) = 2P – H

Second area of resistance (R2) = (P -S1) + R1

Second area of support (S2) = P – (R2 – S1)