Using and Interpreting Intra-day Pivot Points

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Using and Interpreting Intra-day Pivot Points

Pivot Points are a popular tool used by day traders. Pivot Points use yesterday’s price action to provide potentially important price areas today. Therefore, traders run the calculation at night or in the morning to provide themselves with the Pivot Points for the upcoming session. That makes Pivot Points a “predictive” indicator, similar to Fibonacci Retracements or Fibonacci Extensions. There are a number of applications and chart platforms that calculate the Pivot Points for you, but we’ll go through the basic calculation as well.

Pivot Points are a day trading tool, and therefore typically applied to chart time-frames of 15-minutes or less (1-min, 5-min, etc). The Pivot Point levels change from day to day, but don’t change during the day.

There are typically 5 lines using Standard Pivot Points (please note, over the years a number of Pivot Point variations have been developed). All calculations are based on the last trading session.

  • Pivot Point (P) = (high + low + close) / 3
  • Support 1 (S1) = (P x 2) – high
  • Support 2 (S2) = P – (high – low)
  • Resistance 1 (R1) = (P x 2) – Low
  • Resistance 2 (R2) = P + (high – low)

Figure 1 shows how these are applied to a chart.

Figure 1. Pivot Points Applied to Apple (AAPL) – 5-Minute Chart

As the example shows, sometimes several of the levels will not be relevant, as the price doesn’t even come close them. In this case, the price opens at the Pivot (P) and quickly drops, never moving toward R1 and R2.

Interpreting Pivot Points

The Pivot (P) provides a context for the day. When the price is above P it shows strength. When the price is below P it shows weakness. In figure 1 the price drops below P immediately after the open, showing initial weakness. This set a bearish tone and indicated that traders should be more inclined to take short positions (buying puts). The price won’t always stay on one side, but crossing above or below still indicates strength or weakness respectively.

If the price crosses below P, the first target is S1. If the price continues to decline the next target is S2.

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If the price crosses above P, the first target is R1. If the price continues to advance the next is R2.

Additional Pivot Points can also be added, such as R3 or S3 to create even more levels to watch.

S1 and S2 can also act just like normal support. If the price reaches S1 or S2 and stops, traders can look for trade setups or patterns that indicate a bounce, and then take a long position as the price bounces off the support level. Typically traders wait for the price to pause and bounce, and not just assume that these levels will act as support.

In figure 1 the price shows no respect for S2, and just keeps dropping. When this occurs it indicates weakness, and therefore isn’t used as an opportunity to go long (buy calls).

The price does stall at S1, and possibly some traders may have viewed this as a bullish sign. But with overall momentum down, and no strong moves higher, even here traders should be more inclined to look for short positions (buy puts) than look for longs.

R1 and R2 act the same way. They provide areas of potential resistance. If the price reaches and stalls at a resistance area, traders can look for trade signals to go short (buy puts) once the price has shown respect for the resistance level. Don’t assume resistance will hold, rather wait for price to respect it and provide a trade signal.

Figure 2. R1 and R2 Acting as Resistance In GE – 5 minute chart

Pivot Points can be a useful tool for gauging intra-day momentum and providing some potentially important areas which traders can use to filter trade signals. Don’t assume to know what the price will do at a pivot point. You’ll need to watch price action so you can act quickly when signals materialize near these levels.

Pivot Point

What is a Pivot Point?

A pivot point is a technical analysis indicator, or calculations, 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 pivot point is the basis for the indicator, but it also includes other support and resistance levels that are projected based on the pivot point calculation. All these levels help traders see where the price could experience support or resistance. Similarly, if the price moves through these levels it lets the trader know the price is trending in that direction.

  • When the price of an asset is trading above the pivot point, it indicates the day is bullish or positive.
  • When the price of an asset is trading below the pivot point, it indicates the day is bearish or negative.
  • The indicator typically includes four additional levels: S1, S2, R1, and R2. These stand for support one and two, and resistance one and two.
  • Support and resistance one and two may cause reversals, but they may also be used to confirm the trend. For example, if the price is falling and moves below S1, it helps confirm the downtrend and indicate a possible continuation to S2.

The Formulas for Pivot Points:

High indicates the high price from the prior trading day,

Low indicates the price from the prior trading day, and

Close indicates the closing price from the prior trading day.

How to Calculate Pivot Points

The pivot point indicator can be added to a chart, and the levels will automatically be calculated and shown. Here’s how to calculate them yourself, keeping in mind that pivot points are predominantly used by day traders and are based on the high, low, and close from the prior trading day. If it is Wednesday morning, use the high, low, and close from Tuesday to create the pivot point levels for the Wednesday trading day.

  1. After the market closes, or before it opens the next day, find the high, low and close from the most recent day.
  2. Sum the high, low, and close and then divide by three.
  3. Mark this price on the chart as P.
  4. Once P is known, calculate S1, S2, R1, and R2. The high and low in these calculations are from the prior trading day.

Pivot Points

What Do Pivot Points Tell You?

Pivot points are an intra-day indicator for trading futures, commodities, and stocks. Unlike moving averages or oscillators, they are static and remain at the same prices throughout the day. This means traders can use the levels to help plan out their trading in advance. For example, they know that, if the price falls below the pivot point, they will likely be shorting early in the session. If the price is above the pivot point, they will be buying. S1, S2, R1, and R2 can be used as target prices for such trades, as well as stop loss levels.

Combining pivot points with other trend indicators is a common practice with traders. A pivot point that also overlaps or converges with a 50-period or 200-period moving average, or Fibonacci extension level, becomes a stronger support/resistance level.

The Difference Between Pivot Points and Fibonacci Retracements

Pivot points and Fibonacci retracements or extensions both draw horizontal lines to mark potential support and resistance areas.

Fibonacci retracement and extension levels can be created by connecting any price points on a chart. Once the levels are chosen, then lines are drawn at percentages of the price range selected.

Pivot points don’t use percentages and are based on fixed numbers: the high, low, and close of the prior day.

Limitations of Pivot Points

Pivot points are based on a simple calculation, and while they work for some traders, others may not find them useful. There is no assurance the price will stop at, reverse at, or even reach the levels created on the chart. Other times the price will move back and forth through a level. As with all indicators, it should only be used as part of a complete trading plan.

Using and Interpreting Intra-day Pivot Points

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How to predict and trade the stock market using pivot points

Updated on 2020-05-09

Pivot points are support and resistance levels calculated using previous session’s data. They were originally used by floor traders to find the market direction during a trading session.

Based on the high, low and close values of the previous session, it uses basic calculations to create several resistance and support levels. These levels are known as pivot levels and they are used by so many traders that you will find that the market reacts pretty often at these levels.

One of the main advantages of pivot points is that it allows you to predict potential support and resistance areas and therefore know your entries and exits before the start of the next trading session. You can for example choose which assets to trade based on how wide the support/resistance distance is.

There are several pivot points versions

With the growth of the pivot points popularity, several versions have emerged. Each has its own formula but almost all have the same interpretation.

Let us first introduce you to the most popular one, which is simply called classic or floor pivot points:

Range = (high – low);

PP = (high + low + close) / 3; // Pivot Point

R1 = 2 * PP – low; // First resistance
R2 = PP + Range; // Second resistance
R3 = PP + Range * 2;
R4 = PP + Range * 3;

S1 = 2 * PP – high; // First support
S2 = PP – Range; // Second support
S3 = PP – Range * 2;
S4 = PP – Range * 3;

Based on the above formula, you can clearly see that pivot points calculation is very simple and that it can be applied to any market and any assets including stocks, Forex, ETFs, bonds, futures and commodities.

Other versions include Woodie Pivot Points, Camarilla pivot points and Tom DeMark’s Pivot Points.

Woodie Pivot Points:

Unlike the classic version, the Woodie’s one uses the open price of the next session to calculate pivot point levels.

R4 = R3 + RANGE
R3 = H + 2 * (PP – L)
R2 = PP + RANGE
R1 = (2 * PP) – LOW
PP = PP = (HIGH + LOW + 2 * Tomorrow’s OPEN) / 4
S1 = (2 * PP) – HIGH
S2 = PP – RANGE
S3 = L – 2 * (H – PP)
S4 = S3 – RANGE

Camarilla Pivot Points:

Camarilla equation uses close, high and low prices and produces eight levels. This method was discovered by Nick Stott, a bond trader, while he was day trading.

R4 = (H−L)Ч1.1/2+C
R3 = (H−L)Ч1.1/4+C
R2 = (H−L)Ч1.1/6+C
R1 = (H−L)Ч1.1/12+C
S1 = C−(H−L)Ч1.1/12
S2 = C−(H−L)Ч1.1/6
S3 = C−(H−L)Ч1.1/4
S4 = C−(H−L)Ч1.1/2

Tom DeMark’s Pivot Points:

These are not pivot points exactly, but they can be used to predict tomorrow’s low and high (support & resistance). The indicator was created by Tom DeMark.

X = H+2ЧL+C // If Close Open
X = H+L+2ЧC; // Close = Open
New High = X/2−L
New Low = X/2−H

x = 0;
x = iff(close open, x, 2*high+low+close);
x = iff(close == open, x, high+low+2*close);
NewHigh = X/2-low;
NewLow = X/2-high;

Trading Pivot points

There are several ways to trade pivot points. The majority of traders are using them to find good entry and exit levels.

The following shows you one set up to trade pivot points:

Before the market begins, we analyze several stocks looking for the ones that closed below tomorrow pivot point. Another condition must also be met: Range, in percentage, between the S1 and S2 must be higher than 2%.

The daily scanner can be downloaded here: Pivot Point Breakout Scanner

It uses the screener tool to analyze stocks looking for the ones that meet the above criteria.

One you get your list of stocks, use the following intraday entry and exits to take new short trades.

Entry: Price closes below the support line (S1)
Exit: Price reaches S2
Stop: Price closes few points above the support line (S1)

There are so many ways to trade pivot points. Here is another one:

The market opens between R2 and R3 then crosses R3 line and pulls back. Place an entry order few cents above the resistance line and an exit order few cents below that line. A profit stop order can also be placed at the R4 line.

How to plot pivot points in an intraday chart

Open an intraday chart. Make sure you have data for at least 2 days. If it not the case then get data using one of the intraday downloader available in QuantShare Sharing Server.

Download the following indicator: Floor Traders Pivots then add it to your chart.

p = FloorTradersPivots();
plot(p, “FloorTradersPivots”, colorBlack, ChartLine, StyleOwnScale);

EOD pivot points based on weekly, monthly and yearly data

Besides intraday pivot points, end-of-day ones do exist. Instead of using the previous session data to calculate levels for today, we can use the previous week or month data to create pivot levels that can be applied to the current week or month.

Weekly pivot point can be used to predict short-term movements. For medium term predictions, you may use monthly pivot point and for the long-term, you can use yearly pivot point.

Using pivot points with other indicators

Using other indicators and techniques in combination with pivot points will certainly help you make better trading decisions. It might be a moving average crossover, MACD been in an uptrend or the RSI indicating an oversold area.

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