Pivot Points Trading Strategy (2024)

What Is the Pivot Points Trading Strategy?

Pivot points are used by traders of stocks and commodities to predict or anticipate support and resistance levels in the current or upcoming session. Calculated based on the high, low, and closing prices of the previous trading session, pivot points are used to predict pricesupportandresistancelevels in the next session.

Thesesupport and resistancelevels are used by traders to determine entry andexit points,both for stop-losses andprofit-taking.

Generally, it is seen as a bullish sign if a stock or commodity opens at a price above its previous pivot point. It is a bearish sign if it opens below its previous pivot point.

How to Calculate Pivot Points

There are several methods for calculating pivot points, the most common of which is the five-point system. This system uses the previous day's high, low, and close, along with two support levels and two resistance levels (totaling five price points), to derive a pivot point. The equations are as follows:

$\text{Pivot Point} = \frac{\left(\text{Previous High} + \text{Previous Low} + \text{Previous Close}\right)}{3}$PivotPoint=3(PreviousHigh+PreviousLow+PreviousClose)​

$\text{Support 1 (S1)} = \left(\text{Pivot Point}*2\right) - \text{Previous High}$Support1(S1)=(PivotPoint∗2)−PreviousHigh

$\text{Support 2 (S2)} = \text{Pivot Point} - \left(\text{Previous High}- \text{Previous Low}\right)$Support2(S2)=PivotPoint−(PreviousHigh−PreviousLow)

$\text{Resistance 1 (R1)} = \left(\text{Pivot Point}*2\right) - \text{Previous Low}$Resistance1(R1)=(PivotPoint∗2)−PreviousLow

$\text{Resistance 2 (R2)} = \text{Pivot Point} + \left(\text{Previous High}- \text{Previous Low}\right)$Resistance2(R2)=PivotPoint+(PreviousHigh−PreviousLow)

For stocks that trade only during specific hours of the day,use the high, low,and close from the day's standard trading hours.

In 24-hour markets, such as the forex market in which currencies are traded, pivot points are often calculated using New York closing time (4 p.m. EST) on a 24-hour cycle. Other traders opt for Greenwich Mean Time, using 23:59 GMT for the close of a trading sessionand 00:00 GMT for the opening of a new session.

While it's usual to apply pivot points to the chart using data from the previous day to provide support and resistance levels for the next day, it's also possible to use last week's data and make pivot points for next week. This would serve swingtradersand, to a lesser extent,day traders.

Alternative Methods

Another common variation of the five-point system is the inclusion of the opening price in the formula:

$\text{Pivot Point} = \frac{\left(\text{Today's opening} + \text{Yesterday's High} + \text{Yesterday's Low} + \text{Yesterday's Close}\right)}{4}$PivotPoint=4(Today’sopening+Yesterday’sHigh+Yesterday’sLow+Yesterday’sClose)​

Here, the opening price is added to the equation. The supports and resistances can then be calculated in the same manner as the five-point system, except with the use of the modified pivot point.

Yetanother pivot-point system was developed by Tom DeMark,founder and CEO of DeMARK Analytics.

This system uses the following rules:

As you can see, many pivot-point systems are available.

While knowing how to calculate pivot pointsis important for understanding what you're using, most charting platforms calculate pivot points for us. Simply add the pivot-pointindicators to your chartand choose the settings you prefer.

Interpreting and Using Pivot Points

The pivot point itself is the primary support and resistance when calculating it. This means that the largest price movement is expected to occur at this price.

The other support and resistance levels are less influential, but may still generate significant price movements.

Pivot points can be used in two ways. The first way is to determine the overall market trend. If the pivot point price is broken in an upward movement, then the market is bullish. If the price drops through the pivot point, it is bearish.

The second method is to use pivot point price levels to enter and exit the markets. For example, a trader might put in a limit order to buy 100 shares if the price breaks a resistance level. Alternatively, a trader might set a stop loss at or near a support level.

While at times it appears that pivot levels are very good at predicting price movement, at other times they appear to have no impact at all. No single technical tool can be relied on exclusively.

The success of a pivot point system lies squarely on the shoulders of the trader and depends on their ability to effectively use it in conjunction with other forms of technical analysis.

These other technical indicators can be anything from aMACDto candlestick patterns, or using a moving average to help establish the trend direction.

The greater the number of positive indications for a trade, the greater the chances for success.

The Bottom Line

Pivot points are a great way to identify areas of support and resistance, but they work best when combined with other types of technical analysis. Pivot points are based on a simple calculation, and while they work for some traders—like traders of binary options—other traders may not find them useful.

There is no assurance the price will stop at, reverse at, or even reach the levels created on the chart. Other times, the price will move back and forth through a level.

As with all indicators, it should only be used as part of a completetrading plan.