Support and Resistance levels are important in trading as price reactions around these can give clear hints to the probability of the continuation of a trend or its reversal.
Pivot points are derived from the previous days, weeks or months price action and often form useful support and resistance levels. Pivot points are especially popular amongst day traders for quick decision making while reversal traders use these for longer term deeper positional trades.
As the name “Pivot” implies, these levels can often be where prices pivot i.e. turn around and reverse.
A pivot point is a technical analysis indicator used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low and closing prices from the previous trading day. On the subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment
The calculation takes into account the following to calculate the S (Support) and R (Resistance) levels:
- Previous Day’s High (H)
- Previous day’s Low (L)
- Previous day’s Close (C)
- 2 Support Levels (S1 and S2)
- 2 Resistance Levels (R1 and R2)
To calculate P, the pivot point, we equate:
R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C) / 3
S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)
The distance between the levels is determined by the previous periods price action. On quiet days with little volatility the Pivot Points for the next period will be quite close together. Other times when a market has made huge swings or has been in a trend the next periods Pivot Points can be far apart.
Due to the importance of these levels, prices are often very volatile at these levels as traders battle it out for control of ticker and end up creating high levels of congestion. Prices will tend to bounce around, above and below these levels for a while before either reversing or continuing with the previous trend.
The PL Mobile App gives you these levels for all scrips within its Scanners section apart from individual company pages so you don’t have to go around doing messy calculations or buying expensive software.
As with all trading strategies, we recommend using them in combination with other indicators.
Quite frequently a Pivot Point will line up with other Support and Resistance levels, a moving average for example, or the open price behavior for the period. This adds weight to their importance and probable impact as and when price reaches this level.
The pivot point sets the general tone for price motion. A flow above P is fine and indicates power. Remember the fact that P is based on the prior period’s stats. A move above the pivot point indicates strength with a goal to reach the primary resistance, R1. A smash above first resistance suggests even more strength with a goal to the second resistance level, R2. If the prices come down to S1 and stay put, then may start expecting an upturn from the support level. In the same way, if the prices go up and reach R1 or any other Resistance level and break, then they may expect a decline in the making. In order to strengthen this expectation, one must also look at the indicator signal.
Some traders exit their trades or part of their trades just before price reaches one of these levels anticipating some level of resistance. Others exit their trades just after price has gone through one of these levels anticipating a quick acceleration in prices as they pass through the level.
Time Frames in Pivot Points
We will look at the prior day’s numbers when we have to calculate pivot points for a time frame of 1, 5, 10 & 15 minutes. So, we will be basing our intraday charts on the previous day’s H, L and C. The value of P, once set, remains constant for that day.
We will look at the prior week’s numbers when we have to calculate pivot points for a time frame of 30 & 60 minutes. So, we will be basing our intraweek charts on the previous week’s H, L and C. The value of P, once set, remains constant for till the end of the week.
The same can be extended to a month or a year.
Traders use these values to decide their course of action.
The PL Mobile App gives you Pivot levels for all stocks within its scanners section and this, along with other such scanners like Open = High or Low etc can substantially boost profitability for intra day or positional traders. To learn more about how to use these indicators together, and carry out reversal trades, do watch our video at https://www.youtube.com/watch?v=qY9lY4GZDMg