A Pivot Point in technical analysis is a key tool for assessing the probable direction of market movement over the upcoming time frame. This tool is based on calculating the average of the previous period's high, low, and closing prices, and it serves as a central reference level for the current trading day. A pivot represents a psychological turning point in the market, upon which many professional traders base their decisions.
If the current day’s price moves above the pivot, it signals the dominance of buyers and a potential upward trend. Conversely, if the price is below the pivot, it is usually considered a signal of bearish market sentiment. Additionally, key support (S1, S2, S3) and resistance (R1, R2, R3) levels are also calculated based on the pivot point. These levels are important tools for trade entries and exits, setting stop losses, and defining price targets. Traders interested in daily analysis and swing trading often use the pivot to determine their entry strategies at the market’s open.
The standard pivot point calculation formula is very simple, yet it provides valuable insights into the market’s price equilibrium. The main formula is as follows:
Pivot Point (P) = (High + Low + Close) / 3
Once this value is obtained, the primary support and resistance levels can be calculated using the following formulas:
R1 = (2 × P) – Low
S1 = (2 × P) – High
For the next levels:
R2 = P + (High – Low)
S2 = P – (High – Low)
And if needed, even higher levels such as R3 and S3 can be derived by extending this pattern.
In the forex market, prices corresponding to the New York candle (00:00 GMT) are typically used for calculating the High/Low/Close. This standard allows analysts to perform more unified analyses based on global timing. The importance of using accurate data from the previous day in pivot calculation lies in the fact that these reference points are formed based on actual market behavior, not on subjective forecasting.
Analytical software such as MetaTrader, TradingView, or proprietary broker platforms usually display these levels automatically. However, familiarity with the calculation method is essential for a deeper understanding of price behavior around these critical levels.
Understanding the difference between aPivotandPivot Pointsis essential for the proper use of this technical analysis tool.
Pivot:
A pivot, in general, refers to any significant price level or point where traders expect the price to either reverse direction or continue its movement. These points can be identified subjectively through visual analysis or with the help of various tools. For example, a previous price high or low is considered a pivot.
Pivot Points:
Pivot Points, in contrast to general pivots, are levels that are calculated precisely using mathematical formulas. These levels are typically used by day traders or swing traders to identify potential support and resistance levels for the next trading day. Pivot Points include the central level (Pivot Point) as well as support levels (S1, S2) and resistance levels (R1, R2), which are calculated based on the previous day’s High, Low, and Close prices.
Given the market’s needs and various trading styles, different types of Pivot Points have been developed. This variety allows traders to choose the one that best fits their strategy:
This is the simplest and most commonly used type of pivot, calculated using the classic formula mentioned earlier. It is mostly used in markets with moderate volatility and is a practical choice for traders seeking basic daily levels.
This model uses the same basic data but applies Fibonacci ratios such as 0.382, 0.618, and 1.000 to calculate the support and resistance levels.
In this model, greater weight is given to the closing price. The formula assigns more emphasis to the Close than to the High and Low.
This model calculates four support and four resistance levels using a formula different from the others. These levels are usually closer to the current price, making them more attractive to scalpers and day traders.
A more complex model that determines market turning points based on the relationship between the previous day’s Open, Close, and either High or Low. Unlike other pivot models, DeMark focuses more on predicting reversals than identifying consolidation zones.
Each of the models above has its strengths and can be selected based on market type, time frame, experience level, and trading strategy. For example:
Pivot Points are entirely objective tools. Unlike indicators that use price derivatives, Pivot Points are derived directly from raw market data, which means they do not suffer from lag.
In technical analysis, Pivot Points are a crucial tool for determining market direction, identifying entry and exit points, and even spotting breakouts and reversals. Day traders and scalpers, in particular, use this tool to gain a better understanding of market structure in shorter time frames.
The first and perhaps most important use of Pivot Points is trend analysis. If the current price is above the daily pivot point, it is generally interpreted as a signal of bullish market sentiment. Conversely, when the price is below the pivot level, it is seen as an indication of potential bearishness. This simple analysis helps many traders decide whether to take long positions or stay on the sell side for the day.
Support levels (S1, S2) and resistance levels (R1, R2), calculated from the pivot, act as potential entry and exit points. If the price drops from the pivot toward S1, a reaction is often expected at S1, offering a potential buy opportunity. On the other hand, if the price approaches R1 and bullish momentum is sustained, R1 can be set as a profit target. Additionally, in the event of a breakout beyond these levels, they can be used for placing stop loss (SL) orders.
When the price breaks through the pivot level with strong momentum and volume, there is a high probability of a new trend forming. However, if the price fails to break through support or resistance and returns to the pivot, this is often interpreted as a potential trend reversal. These patterns, especially when combined with volume analysis, can provide reliable signals for entering or exiting trades.
In situations where the market lacks a clear trend and fluctuates between levels, Pivot Points can serve as the central axis in scalping strategies. Many traders profit from the price movement between S1 and R1 during range periods. In such conditions, combining Pivot Points with indicators like RSI can offer more precise entry points.
Both Pivot Points and Fibonacci Retracements are used in technical analysis as potential support and resistance levels. However, there are key differences between the two that are essential to understand when choosing the right tool.
Pivot Points are calculated based on the previous period’s high, low, and closing prices (typically daily or weekly). Therefore, it is a time based tool that follows the daily structure of the market. Pivot Points are mostly used in day trading to interpret price behavior within the same trading day.
In contrast, Fibonacci Retracement is a geometric ratio based tool that identifies potential reversal or continuation levels by plotting percentages of a prior price move. These levels are independent of time and are based on the geometry of past price actions.
Another difference lies in the number and spacing of levels. In Fibonacci, levels such as 38.2%, 61.8%, and 78.6% are used as the basis for analysis, whereas Pivot Points provide fixed, linear levels like R1, R2, S1, S2.
In general, Pivot Points are more suitable for traders seeking short term trends and entry/exit points on lower time frames, while Fibonacci is more useful for medium term analysis and predicting reversal zones.
Combining both tools can greatly enhance the strength of analysis provided they are used in the right market conditions.
Effective use of Pivot Points requires familiarity with supporting tools, precise timing, and proper implementation within your trading strategy. Below are some practical and combined approaches to consider:
One of the best ways to improve the accuracy of Pivot Point signals is to use them alongside other indicators such as MACD or RSI.
For example, if the price breaks above the R1 level while the RSI is in the overbought zone, there may be a high probability of a price reversal. Conversely, if a pivot is broken and the MACD shows a bullish crossover, it may indicate a continuation of the upward trend.
These combinations are especially useful for filtering out false signals caused by short term volatility.
Pivot Points can be calculated on different time frames (daily, weekly, monthly), but daily pivots are most effective during the overlap of the London and New York sessions.
During this period, market liquidity peaks, and price reactions to pivot levels tend to be more accurate.
Therefore, the timing of entry based on pivots should align with the active market time frame.
To calculate and plot Pivot Levels, tools such as custom Excel sheets, indicators in MetaTrader, or platforms like TradingView can be used. These tools automatically calculate and display the levels on the chart, making analysis and decision making easier for traders.
Despite their simplicity, Pivot Points offer notable advantages. However, like any analytical tool, relying on them without understanding their limitations can be risky.
Pivot Points are very straightforward tools with no complex calculations, and they can be used across all markets and timeframes. These levels:
On the other hand, because pivot point calculations are based on historical prices, they may not perform optimally under certain market conditions especially during news releases or high volatility. Some of the key weaknesses include:
| Advantages | Disadvantages |
| Simple to calculate and easy to understand | Lagging and dependent on historical data |
| Defines precise entry/exit levels | Weak performance in highly volatile or news driven markets |
| Usable across multiple timeframes | Requires combination with other tools for higher accuracy |
| Suitable for various trading strategies | Potential for false signals if used in isolation |
Although Pivot Points are most commonly used in the forex market, this analytical tool also has widespread applications in other financial markets such as stocks, commodities, and cryptocurrencies. What matters is that the trader adjusts pivot levels according to the unique structure and volatility of each market.
In the stock market, pivot points are typically calculated based on the previous day’s closing prices and are used on daily and weekly timeframes to identify short term trends.
In commodity markets, such as gold or oil, where volatility is higher, the support and resistance levels derived from pivots often act as psychological price zones closely monitored by institutional traders.
In the cryptocurrency market, pivot points can be highly useful in technical analysis especially when the market lacks clear direction or needs to consolidate after a strong price move. Due to the 24/7 nature of the crypto market, it is recommended to calculate pivot levels based on UTC candles or the New York session close.
In general, the higher the market volatility, the lower the precision of pivot points, making it essential to combine them with other indicators or filters. Nonetheless, pivot points remain a reliable reference for identifying key market levels, regardless of whether the market in question is forex, stocks, or digital assets.
Pivot Points are not merely computational tools; they can serve as the foundation for diverse and professional trading strategies in financial markets. Depending on the market type, trader personality, and trading timeframe, various pivot based strategies have been developed each with its own advantages and specific considerations. This section highlights three common and effective approaches:
In markets lacking a clear trend (range bound markets), trading around pivot levels is a highly popular strategy. Here, the trader assumes that price will remain stable between support and resistance levels:
This strategy is particularly suitable for scalping and short term trades, and its accuracy can be enhanced with indicators such as RSI or Stochastic Oscillator.
When the market shows a strong move after a period of consolidation, breaking through pivot levels can mark the beginning of a new trend. In this strategy:
To reduce the risk of false breakouts, additional confirmations such as strong candlestick patterns or a bullish MACD crossover can be helpful.
When the price remains above or below the pivot point for a sustained period, it indicates the strength of the prevailing market trend. In this case:
This strategy is more suitable for higher timeframes, such as 4 hour or daily charts, and requires more precise risk management.
