Pivot Point: Definition, Formulas, and How to Calculate

What Is a Pivot Point?

A pivot point is a price level calculated from previous prices. It's used to indicate potential areas of support or resistance that offer attractive reward-to-risk setups for trades. The pivot point itself is simply the average of the intraday high and low and the closing price from the previous trading day. Trading above the pivot point on the subsequent day is thought to indicate ongoing bullish sentiment. 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. It lets the trader know that the price is trending in that direction if the price moves through these levels.

The Formula for Pivot Points

$\begin{aligned} &P = \frac{\text{High} + \text{Low} + \text{Close}}{3}\\ &R1 = (P \times 2) - \text{Low}\\ &R2 = P + (\text{High} - \text{Low})\\ &S1 = (P \times 2) - \text{High}\\ &S2 = P - (\text{High} - \text{Low})\\ &\textbf{where:}\\ &P=\text{Pivot point}\\ &R1=\text{Resistance 1}\\ &R2=\text{Resistance 2}\\ &S1=\text{Support 1}\\ &S2=\text{Support 2}\\ \end{aligned}$​P=3High+Low+Close​R1=(P×2)−LowR2=P+(High−Low)S1=(P×2)−HighS2=P−(High−Low)where:P=Pivot pointR1=Resistance 1R2=Resistance 2S1=Support 1S2=Support 2​

• High indicates the highest price from the prior trading day
• Low indicates the lowest price from the prior trading day
• Close indicates the closing price from the prior trading day

How to Calculate Pivot Points

The pivot point indicator can be added to a chart and the levels will automatically be calculated and shown but you can calculate them yourself. Keep in mind that pivot points are predominantly used by day traders and are based on the high, low, and close from the previous trading day. Use the high, low, and close from Tuesday to create the pivot point levels for the Wednesday trading day.

1. Find the day's high and low after the market closes or before it opens the next day as well as the close from the most recent previous trading day.
2. Add the high, low, and close and then divide by three.
3. Mark this price on the chart as P.
4. Calculate S1, S2, R1, and R2 when P is known. The high and low in these calculations are from the prior trading day.



What Do Pivot Points Tell You?

Pivot points are an intraday indicator for trading futures, commodities, and stocks. They're static and remain at the same prices throughout the day unlike moving averages or oscillators. Traders can use the levels to help plan their trading.

Traders know that they'll likely be shorting early in the session if the price falls below the pivot point. They'll be buying if the price is above the pivot point. S1, S2, R1, and R2 can be used as target prices for such trades as well as for stop-loss levels.

Combining pivot points with other trend indicators is common practice for traders. A pivot point that also overlaps or converges with a 50-period or 200-period moving average (MA) or Fibonacci extension level becomes a stronger support/resistance level.

Pivot Points vs. Fibonacci Retracements

Pivot points and Fibonacci retracements or extensions both draw horizontal lines to mark potential support and resistance areas. The Fibonacci indicator is useful because it can be drawn between any two significant price points, such as a high and a low, and it will then create the levels between those two points.

Fibonacci retracement and extension levels can be created by connecting any price points on a chart. Lines are drawn at percentages of the price range selected when the levels are chosen.

Pivot points don't use percentages. They're based on fixed numbers: the high, low, and close of the previous day.

Limitations of Pivot Points

Pivot points are based on a simple calculation and they work for some traders like binary options traders. Other traders might not find them useful, however. There's no assurance that the price will stop at, reverse at, or even reach the levels created on the chart.

The price will move back and forth through a level at other times. As with all indicators, pivot points should only be used as part of a complete trading plan.

What Is an Oscillator and How Does It Work?

An oscillator is an indicator that's based on price. It compares the most recent closing price to a range of prices and is intended to shine a spotlight on whether the closing price is overbought or oversold in context with the range. The higher the percentage, the more likely it is that the stock is overbought.

What Is a Fibonacci Indicator and How Is It Used?

The Fibonacci indicator is a horizontal line that can be drawn between any two price points to display the levels between those points. This marks potential support and resistance areas.

How Does a Stop-Loss Order Work?

A stop-loss order directs that a trade be terminated either by sale or purchase when a target or condition price is met. The price would be less than the amount paid. This is different from a stop-limit order that cites two price points.

The Bottom Line

A pivot point is a price level that results from a calculation of previous prices. Trading above the pivot point is a bullish move. Trading below it indicates bearish intentions. The idea is to pinpoint potential areas of support or resistance indicating the direction in which the price is trending.

Pivot points predict likelihoods, not certainties. There’s no guarantee that prices will follow the levels on the chart because prices are moving targets. Pivot points can nonetheless be helpful indicators when they're used as part of a larger trading plan.