Pivot Points

Discover the essential tool for technical analysis with ChartSchool's comprehensive guide on Pivot Points. Learn the mechanics and strategies behind pivot points to enhance your investment decisions.

What Are Pivot Points?

Pivot Points are significant levels on a chart that traders and investors can use to determine directional movement and potential support/resistance levels. Pivot Points use the prior period's high, low, and close to estimate future support and resistance levels. In this regard, Pivot Points are predictive or leading indicators.

There are at least five different versions of Pivot Points. This article will focus on Standard Pivot Points, Demark Pivot Points, and Fibonacci Pivot Points.

Pivot Points were originally used by floor traders to set key levels. Like modern-era day traders, floor traders dealt with a fast-moving environment and short-term focus. At the beginning of the trading day, floor traders would look at the previous day's high, low, and close to calculate a Pivot Point for the current trading day. With this Pivot Point as the base, further calculations were used to set support 1, support 2, resistance 1, and resistance 2. These levels would then be used to assist their trading throughout the day.

Timeframes for Pivot Points

Pivot Points for 1-, 5-, 10-, and 15-minute charts use the prior day's high, low, and close. In other words, Pivot Points for today's intraday charts would be based solely on yesterday's high, low, and close. Once Pivot Points are set, they do not change and remain in play throughout the day.

Pivot Points for 30-, 60-, and 120-minute charts use the prior week's high, low, and close. These calculations are based on calendar weeks. Once the week starts, the Pivot Points for 30-, 60-, and 120-minute charts remain fixed for the entire week. The Pivots do not change until the week ends, and new ones can be calculated.

Pivot Points for daily charts use the prior month's data. Pivot Points for June 1 would be based on the high, low, and close for May. They remain fixed for the entire month of June. New Pivot Points would be calculated on the first trading day of July. These would be based on the high, low, and close for June.

Pivot Points for weekly and monthly charts use the prior year's data.

Standard Pivot Points

Standard Pivot Points begin with a base Pivot Point. This is a simple average of the high, low and close. The middle Pivot Point is shown as a solid line between the support and resistance pivots. Keep in mind that the high, low and close are all from the prior period.

Pivot Point (P) = (High + Low + Close)/3

Support 1 (S1) = (P x 2) - High

Support 2 (S2) = P  -  (High  -  Low)

Resistance 1 (R1) = (P x 2) - Low

Resistance 2 (R2) = P + (High  -  Low)

The chart below shows the Nasdaq 100 ETF (QQQ) with Standard Pivot Points on a 15-minute chart. At the start of trading on June 9, the Pivot Point is in the middle, the resistance levels are above, and the support levels are below. These levels remain constant throughout the day.

Fibonacci Pivot Points

Fibonacci Pivot Points start just the same as Standard Pivot Points. Fibonacci multiples of the high-low differential from the base Pivot Point are added to form resistance levels and subtracted to form support levels.

Pivot Point (P) = (High + Low + Close)/3

Support 1 (S1) = P - {.382 * (High  -  Low)}

Support 2 (S2) = P - {.618 * (High  -  Low)}

Support 3 (S3) = P - {1 * (High  -  Low)}

Resistance 1 (R1) = P + {.382 * (High  -  Low)}

Resistance 2 (R2) = P + {.618 * (High  -  Low)}

Resistance 3 (R3) = P + {1 * (High  -  Low)}

The chart below shows the Dow Industrials SPDR (DIA) with Fibonacci Pivot Points on a 15-minute chart. R1 and S1 are based on 38.2%, R2 and S2 are based on 61.8%, and R3 and S3 are based on 100%.

Demark Pivot Points

Demark Pivot Points start with a different base and use different formulas for support and resistance. These Pivot Points are conditional on the relationship between the close and the open.

If Close < Open, then X = High + (2 x Low) + Close

If Close > Open, then X = (2 x High) + Low + Close

If Close = Open, then X = High + Low + (2 x Close)

Pivot Point (P) = X/4

Support 1 (S1) = X/2 - High

Resistance 1 (R1) = X/2 - Low

The chart below shows the Russell 2000 ETF (IWM) with Demark Pivot Points on a 15-minute chart. There is only one resistance (R1) and one support (S1). Demark Pivot Points do not have multiple support or resistance levels.

Setting the Tone

The Pivot Point sets the general tone for price action. This is the middle line of the group that is marked (P). A move above the Pivot Point is positive and shows strength. Keep in mind that this Pivot Point is based on the prior period's data. It is put forth in the current period as the first important level. A move above the Pivot Point suggests strength with a target to the first resistance. A break above the first resistance shows even more strength with a target to the second resistance level.

The converse is true on the downside. A move below the Pivot Point suggests weakness with a target to the first support level. A break below the first support level shows even more weakness with a target to the second support level.

Support and Resistance

Support and resistance levels based on Pivot Points can be used like traditional support and resistance levels. The key is to watch price action closely when these levels come into play. If prices decline to support and then firm, traders can look for a successful test and bounce off support. It often helps to look for a bullish chart pattern or indicator signal to confirm an upturn from support.

Similarly, if prices advance to resistance and stall, traders can look for a failure at resistance and decline. Again, look for a bearish chart pattern or indicator signal to confirm a downturn from resistance.

The second support and resistance levels can also identify potentially overbought and oversold conditions. A move above the second resistance level would show strength but also indicate an overbought situation that could lead to a pullback. Similarly, a move below the second support would show weakness but suggest a short-term oversold condition that could lead to a price bounce.

The Takeaway

Pivot Points offer chartists a methodology for determining price direction and setting support and resistance levels. Price direction is determined by looking at the current period's price action relative to the pivot point: starting above or below the pivot point or crossing it in either direction during trading. The set support and resistance points come into play after determining price direction. While originally designed for floor traders, the concepts behind Pivot Points can be applied across various timeframes.

As with all indicators, confirming Pivot Point signals with other aspects of technical analysis is important. A bearish candlestick reversal pattern could confirm a reversal at second resistance. An oversold Relative Strength Index (RSI) could confirm oversold conditions at second support. An upturn in MACD could be used to confirm a successful support test.

On a final note, sometimes the second or third support/resistance levels are not seen on the chart. This is because their levels exceed the price scale on the right. In other words, they are off the chart.

Using with SharpCharts

Pivot Points can be found as an Overlay on the SharpCharts Workbench. Standard Pivot Points are the default setting, and the parameters box is empty. Place an “F” in the parameters box to apply Fibonacci Pivot Points. Place a “D” in the box to apply Demark Pivot Points. It is even possible to display all three at the same time.