A pivot point is a technical analysis indicator used to determine the overall trend of the market during different time frames. The pivot point itself is simply the average of the high, low and closing prices from the previous trading day. On a subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates bearish sentiment.
this point is calculated as an average of significant prices (high, low, close) from the performance of a market in the prior trading period. If the market in the following period trades above the point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point is seen as bearish.
The calculation for a pivot point is shown below:
Pivot point (PP) = (High + Low + Close) / 3
Support and resistance levels are then calculated off the pivot point like so:
First level support and resistance:
First resistance (R1) = (2 x PP) – Low
First support (S1) = (2 x PP) – High
Second level of support and resistance:
Second resistance (R2) = PP + (High – Low)
Second support (S2) = PP – (High – Low)
Third level of support and resistance:
Third resistance (R3) = High + 2(PP – Low)
Third support (S3) = Low – 2(High – PP)
Using a Pivot Point
This is a reactionary price level. A pivot point is considered to be supportive, or a support level, if the underlying security is trading higher than the pivot point. A point at a higher price than the underlying security is considered a price resistance level. Prices tend to pause or deflect when a pivot point is initially tested. This can be explained by the widely followed nature of pivot points from retail traders and floor traders to professionals and institutions. Combining pivot points with other trend indicators is a common practice with traders
Strategy with pivot:
A pivot point that also overlaps or converges with a 50-period or 200-period moving average becomes a stronger price support or resistance level.