Pivot Point is a technical analysis indicator used by traders to determine potential support and resistance levels in the price of a financial asset, such as a stock, commodity, or currency. It is calculated based on the high, low, and closing prices of the previous trading period, typically a day. Pivot points are used to predict price movements and identify possible points where the market may change direction.

Key Characteristics of Pivot Points:

1. Calculation:
   • The main pivot point (P) is calculated using the following formula: P=High+Low+Close3P = \frac{\text{High} + \text{Low} + \text{Close}}{3}P=3High+Low+Close​
   • Support and Resistance Levels:
     • Support 1 (S1): $$S1=2P-\text{High}$$
     • Support 2 (S2): $$S2=P-(\text{High}-\text{Low})$$
     • Resistance 1 (R1): $$R1=2P-\text{Low}$$
     • Resistance 2 (R2): $$R2=P+(\text{High}-\text{Low})$$
   • These levels provide traders with key points to watch for potential price reversals or continuations.
2. Support and Resistance:
   • Support Levels: These are price levels at which an asset might experience buying interest, potentially preventing it from falling further. The S1 and S2 levels are used to identify where a price decline might halt and reverse upward.
   • Resistance Levels: These are price levels where selling pressure might emerge, potentially preventing the price from rising further. The R1 and R2 levels help identify where an upward price move might encounter resistance and reverse downward.
3. Trading Strategy:
   • Pivot points are often used by day traders and short-term traders to identify potential entry and exit points. Traders might buy an asset when the price approaches a support level and sell when it approaches a resistance level.
   • Pivot points can also be used to set stop-loss orders or target prices, helping traders manage risk and potential profit.
4. Intraday Trading:
   • Pivot points are particularly popular in intraday trading, where they help traders assess the overall market trend and potential reversal points within a single trading day. Since they are based on the previous day’s prices, they provide a framework for understanding market sentiment and price behavior at the start of the trading day.
5. Multiple Timeframes:
   • While pivot points are most commonly calculated for daily trading periods, they can also be applied to other timeframes, such as weekly or monthly periods, depending on the trader’s strategy and the type of asset being traded.
6. Confluence with Other Indicators:
   • Traders often use pivot points in conjunction with other technical indicators, such as moving averages, Relative Strength Index (RSI), or Bollinger Bands, to confirm potential trade setups and improve the accuracy of their predictions.

Example:

Suppose the high, low, and close prices of a stock for the previous trading day were $120, $110, and $115, respectively. The pivot point (P) would be calculated as follows:

P=120+110+1153=115P = \frac{120 + 110 + 115}{3} = 115P=3120+110+115​=115

Using this pivot point, the support and resistance levels would be:

• S1: $2\times 115-120=110$
• R1: $2\times 115-110=120$
• S2: $115-(120-110)=105$
• R2: $115+(120-110)=125$

These levels suggest that if the stock price falls to $110, it might find support and potentially reverse upward. If it rises to $120, it might face resistance and reverse downward.

Importance:

• Market Sentiment: Pivot points provide insight into market sentiment, helping traders understand whether the market is likely to be bullish, bearish, or range-bound.
• Trading Efficiency: By identifying key price levels in advance, pivot points help traders make more informed decisions and execute trades with greater confidence.
• Risk Management: Pivot points can be used to set stop-loss and take-profit levels, helping traders manage risk more effectively.

Pivot points are a valuable tool in technical analysis, providing traders with key support and resistance levels that can guide trading decisions and help predict potential price movements in the financial markets.