What are Pivot Points in Technical Analysis?

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Description: Pivot Points or more commonly called the Floor Pivots are some significant levels used by chartists to identify potential support or resistance on a chart as well as to determine the directional bias of a financial instrument. Pivot Points are calculated by using the previous day’s high, low and close and they project the next day’s support and resistance levels in advance. In this regard, Pivot Points are leading in nature. Pivot Points are of various types such as Standard Pivots (or Floor Pivots), Fibonacci Pivot Points, Camarilla Pivot Points, Demark Pivot Points and Woodie’s Pivot Points. In this article we will focus on just the basic Floor Pivots or Standard Pivots.

Floor Pivots derive their name from the Floor Traders who used these levels on a day in and day out basis for their trading purposes. Floor trading or Pit trading requires one to act fast with a focus on the short-term and these Pivot Points paved the pathway for such an intense undertaking. Every day before the market opened, these Floor traders would calculate the Pivot Point by using the previous day’s high, low and close. Then they calculated four other Pivot Points (two on the upside and two on the downside). The upside pivots were termed as Resistance 1 (R1) and Resistance 2 (R2). Similarly, the downside pivots were called Support 1 (S1) and Support 2 (S2). These traders then used these five pivot levels as a framework to plan their entries and exits for the trading day.

Pivot Point Calculations

The Standard Pivots or Floor Pivots are calculated using the following formulas:

Resistance 2 (R2) = P + (High – Low)

Resistance 1 (R1) = (P x 2) – Low

Pivot Point (P) = (High + Low + Close)/3

Support 1 (S1) = (P x 2) – High

Support 2 (S2) = P – (High – Low)

Pivot Point Timeframes

Pivot Points can be calculated for both higher and lower time frames. However, their values differ depending on the timeframe we choose.

For example, Daily Pivots are calculated based on the previous day’s high, low and close and are plotted on an intraday chart of 1 min, 5 mins, 10 mins and 15mins. These levels remain valid for the current day’s trading session.

Similarly, Weekly Pivots are calculated based on the previous week’s high, low and close and are plotted on a 30 mins, 60 mins and 120 mins chart. These pivots remain valid for one week and are calculated all over again when the current week ends.

Likewise, Monthly Pivots are calculated based on the previous month’s high, low and close and are plotted on a Daily chart. These pivots remain valid for one month and are calculated all over again when the current month ends.

Traders can look for reversal candlestick patterns at Pivot Points to better time their entries and exits in the market.

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Abhijit prefers to define himself with the 3is – investor-trader, instructor and influencer. He has over 14 years of experience in the Indian Financial markets, and is currently, a SEBI Registered Research Analyst and an active trainer. He offers unparalleled services in both training and advisory.

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