What is a Pivot?
A pivot is a significant price level known in advance which traders view as important and may make trading decisions around that level. As a technical indicator, a pivot price is similar to a resistance or support level. If the pivot level is exceeded, the price is expected to continue in that direction. Or the price could reverse at or near that level.
- A pivot is an important price level to a trade on a chart.
- Pivot points are calculated levels that indicate whether a trader should be bullish or bearish, as well as provide potential profit targets.
- Pivots and pivot points provide traders with information about where the price could head next, help them make trading decisions, or generate trade signals.
What Does a Pivot Tell You
There are pivots and pivot points. These terms may mean different things to different people.
A pivot means an important price level to a trader, like an inflection point, where they expect price to either continue in the current direction or reverse course. Some traders view prior high points or low points in the price as a pivot. A trader may view the 52-week high as a pivot point. If the moves above it, the trader anticipates the price will continue higher. But if the price falls back below the prior 52-week high they may exit their position, for example. A pivot can occur on any timeframe.
A pivot can be area that a trader view as important, such as weekly high or low, daily high or low, a swing high/low, or a technical level.
Pivot points are calculated levels. Floor traders originally used a pivot point to establish important price levels, and those are now used by many traders. After analyzing data from the stock’s historical price, a pivot point is used as a guide for how the price may move. Other calculations provide support and resistance levels around the pivot point. Pivot points can be calculated based on various time frames, therefore providing information to day trading, swing traders, and investors.
When the price is above a pivot point it is considered bulllish, when the price is belwo the pivot point it is considered bearish. Levels above the pivot point are calculated and called R1 and R2, with the R standing for Resistance. Levels below the pivot point are calculated and called S1 and S2, with S standing for Support.
If the price moves below the pivot point it may continue to S1. If the price falls below S1, it may continue to S2. The same concept applies to R1 and R2.
How to Calculate a Pivot
A pivot doesn't require a calculation. It just an important price area for the trader to watch.
Pivot points do have a calculation. The calculations for today's pivot levels are based on the prior day's high, low and closing prices.
To calculate a weekly pivot, the high, low and close would be used based on the prior week. To calculate a monthly pivot, the high, low and close would be used for the prior month.
Example of How to Use a Pivot
Swing traders who focus on growth stocks will often view the 52-week high as a pivot, especially following a significant correction.
On the following chart, Apple Inc. (AAPL) peaked at $233.47. This was followed by a more than 35% decline. The price eventually rose back to the old high. Traders were watching the level and bought as the price moved through it. The price continued to move higher.
This won't always happen where the price continues to trend higher after reaching the prior 52-week high. It tends to happen more in strong companies where traders are looking for an opportunity to buy.
Note that the price had already been rising for some time before it reached the 52-week high and exceeded it. Therefore, while the pivot is important, there may have been other technical or fundamental methods that signaled a trader to get in at a better/lower price than the 52-week pivot.
The Difference Between a Pivot and Fibonacci Retracements
Both of these levels are typically drawn on the chart. Fibonacci retracements are calculated levels based on the length of the price swing. Therefore, they will typically provide levels to watch for compared to pivots or pivot points. Fibonacci retracements show how far the price may pull back
Limitations of Using Pivots
Whether using a pivot or pivot points, there will always be other levels that are also important. Focusing only the levels may mean other opportunities are missed.
Pivots and pivot points are best used in conjunction with other forms of analysis
Pivots and pivot points, while important, may get whipsawed leading to losing traders or confusion. For example, the price may move back and forth across the pivot point, moving a trader from bullish to bearish and back again. After moving through a pivot point the price may not proceed to the next expected level, such as R1 or S1.