Pivot Points are used by professional Traders and market makers as a method for determining market trend & short-term support/resistance levels using numerical averages of an instrument’s high, low & close.
The term “pivot” is often thought of as reaching a pre-determined point (support & resistance).
Not only can Long Term Investors, Position, Swing and Day Traders use Pivots as leading indicators to determine bullish or bearish Expansion, they are also utilized for entry & exit points and they can act as a guide for profit target & stop loss placement.
Pivot points are known as a leading indicator. Which makes them stand out as, Pivot Points remain static on a chart for the time frame selected.
Professional Traders utilize Monthly, Weekly, Daily and 240 Bar Pivot Points for Trading and technical analysis. Long term Investors focus on the Yearly pivot points.
Below is a breakdown of how Floor Trader pivots are calculated
· PP = (High + Low + Close) / 3
· S1 = 2 * PP – High
· R1 = 2 * PP – Low
· S2 = PP – (High – Low
· R2 = PP + (High – Low)
· S3 = PP – 2 * (High – Low)
· R3 = PP + 2 * (High – Low)
* PP = Pivot Point
While there are a number of methodologies to trade Pivots, a prime example of how day traders can possibly use Pivot Points for entry and exit signals is to short an instrument as it nears resistance levels with a stop placed just above the R1 level and a profit target placed at the PP. Or, conversely, a enter into long position as price action nears support.
In most scenarios, should price action break a Resistance level, the resistance then (theoretically) turns to a support level. Because the Pivots are static by day, this will not dynamically update should the breach occur.