A pivot is a significant price level established when a stock fails to penetrate it to the up or downside or the price has a breakout past the pivot level. Often, a sudden increase in volume accompanies a move through the pivot 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.
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.
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.
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.
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.
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 two 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.