DEFINITION of 'Pivot'

A pivot price is a price level established as being significant either because the market fails to penetrate it or because a sudden increase in volume accompanies a move through that price level. As a technical indicator, the pivot price is similar to a resistance or support level. If the price is exceeded, a breakout is expected to occur.

BREAKING DOWN 'Pivot'

Calculating a pivot point is a methodology of price determination. Floor traders originally used a pivot point to establish important stock price levels, although an investor with any time frame may now utilize a pivot point. After analyzing data from the stock’s historical price, a pivot point is used as a base. This base is used for further calculations to set multiple support and resistance levels. These are all used for trading throughout the day. Once set, a pivot point is not altered throughout the day.

Information Used Based on Chart Interval

A pivot point using charts 15 minutes or less utilize historical data from the previous period’s high, low and close to formulate predictive or leading indicators. A pivot points using charts greater than 15 minutes but no greater than 60 minutes utilize data based on the previous week's information. Any pivot point calculated with charts using daily information utilizes information from the previous month.

Support and Resistance

A pivot point is a key metric for understanding critical price levels at which a stock moves swiftly. An increase or decrease from this point is referred to as support or resistance. These points are based on prior price action and are defined at levels in which the market chooses a direction.

Pivot Levels

Multiple potential trading ranges may be calculated using a pivot point. These ranges are called pivot levels. A typical investor utilizes a total of two levels, with each level having one support level and one resistance level. Therefore, in addition to a pivot point, the two levels have two support levels and two resistance levels. It is not uncommon for a third level to be used, but it is rare for a stock to reach this level.

Calculations

A trader often calculates a pivot point by adding the previous day’s high, low, and close prices, and dividing by three. He calculates the first support level by multiplying the pivot point by 2 and subtracting the previous day’s high. Meanwhile, he calculates the first resistance level by doubling the pivot point and subtracting the previous day’s low. The second level calculations involve subtracting the previous day’s high and previous day’s low. The second support level subtracts this calculation from the pivot point, while the second resistance level adds this calculation to the pivot point.

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RELATED FAQS
  1. What are the differences between a Pivot and a Pivot Point?

    Understand the basics of pivot trading and the key difference between the calculation of the pivot and the pivot points derived ... Read Answer >>
  2. What are the best technical indicators to complement a forex Pivot Point strategy?

    Learn the best technical indicators used by traders and analysts to complement a forex trading strategy based on daily pivot ... Read Answer >>
  3. How do I calculate forex pivot points?

    Pivot points were originally developed by floor traders in the equity and commodity exchanges. They are calculated based ... Read Answer >>
  4. How are Pivots interpreted by analysts and traders?

    Find out why traders and analysts use pivots in their analysis of price movements and why pivots can be used to create trading ... Read Answer >>
  5. Why are forex Pivot Points important for traders and analysts?

    See why pivot point analysis is particularly applicable to the forex market and what traders consider when they use pivot ... Read Answer >>
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