What Is a Pivot Point in Stock Trading
Dedicated traders rely on pivot points to determine the potential direction of stock price movements. A pivot point offers an objective analysis of the market, which can be useful for professional investors who can use this data to make well-informed decisions.
What is a pivot point, and how does it work? This guide will introduce you to this measurement and how you might use pivot points when trading on platforms like moomoo.
What Is a Pivot Point?
A pivot point is a type of technical analysis often used by professional and floor traders. It refers to the moving average of the current trading day's high and low prices and the previous day's closing price.
Pivot points can also be used to determine the following:
Support levels: When demand is sufficient to prevent further price drops
Resistance levels: When demand is low enough to prevent further increases
Together, the pivot points, support and resistance levels can potentially help traders determine the possible direction in which price changes will move.
What Do Pivot Points Tell You
A pivot point in stock trading will help you identify key market trends and/or reversals. For example, a pivot point might be used to estimate when the market will shift from bearish to bullish or vice versa.
If the next-day trading is taking place above the calculated pivot point levels, this can indicate bullish sentiment. Conversely, trading below the pivot point indicates bearish sentiment.
How to Use Pivot Points
A day trader might use pivot points to determine entry and exit points and stops and develop an objective strategy to maximize profits. Traders will buy when the price falls above the pivot point, though if it falls below, they’ll likely be shorting early in the trading session.
Here’s how pivot points are calculated and applied as a stock trading strategy.
Pivot Point Formulas
Recall that a pivot point calculation can potentially help you determine the pivot levels themselves as well as support and resistance levels.
Here’s how to calculate the pivot point:
Pivot Point = (High + Low + Closing Price) / 3
In this formula, “high” refers to the highest trading price from the previous day, while “low” refers to the lowest price from the previous day. The pivot point is a simple average of the high and low prices and the closing price of the preceding trading day.
Support levels can be calculated as follows:
Support (1) = (P x 2) / (High)
Support (2) = P – (High – Low)
Support (3) = Low – 2(High – P)
Resistance levels can be calculated as follows:
Resistance (1) = (P x 2) – Low
Resistance (2) = P + (High – Low)
Resistance (3) = High + 2(P – Low)
Reminder: Always carry out the operations in parentheses before completing the remainder of the formula.
Pivot Point Calculations
Now that you have the formulas, it’s easy to calculate the pivot points. But remember, you can only calculate the pivot point for the preceding day.
Here’s how to calculate the pivot point:
Find the previous day’s high, low and closing prices.
Add the previous day’s high, low and closing prices, then divide by three.
Mark this price on your chart, labeling it “P” for pivot point.
Use your high and low values to calculate your resistance and support levels.
This establishes a static metric for determining the price action of the market. Once you figure out your pivot point, you can compare the current day’s trading prices to determine when to buy (when trading is above the pivot point) or short (when trading is below the pivot point).
Pivot Points vs. Fibonacci Retracements
Pivot points are often compared to Fibonacci retracements because both methods use horizontal lines to demark support and resistance levels.
The key difference is that Fibonacci levels rely on some degree of subjectivity in selecting swing prices, which are then translated into percentages. But pivot point calculations don’t rely on percentages — instead, they use fixed points to determine a trading day's high, low and closing prices.
Still, technical studies of Fibonacci levels reveal that the method is potentially capable of accurate predictions, which is why traders might use both types of analysis.
Advantages of Pivot Points
Pivot point analysis offers key advantages for traders, including:
Relying on objective data to make clear calculations
Helping to determine when to enter/exit the market
Making use of a fixed calculation that doesn’t change during the trading period
As such, pivot points can be useful for traders looking for quantitative data to influence trading decisions and more reliably predict market movements.
Things to Consider with Pivot Points
Investors should also consider the following about pivot points:
They require technical calculations that may be intimidating for beginners.
Data from the previous trading day can’t reliably predict the future.
There’s no reason to expect prices to arrive at pivot point levels.
While pivot point levels aren’t definitive guides, many day traders still find the data useful for planning their investing moves.
Is It All in the Numbers?
When it comes to trading, technical analysis may be the closest thing to a crystal ball.
Methods like pivot points can be useful for mapping out investing decisions and making smarter moves. At the same time, no analytical method is absolute, and even technical calculations like those above can account for all the factors influencing the market.
That said, traders who adopt these practices will be better equipped to build wealth and achieve their investing goals.
Frequently Asked Questions
1. What is Fibonacci's pivot point?
The calculation is the same, though you’ll multiply the previous day’s range by a Fibonacci level — usually 38.2%, 61.8% or 100% — to provide a broader range than a simple pivot point alone.
2. Is pivot point good for trading?
The short answer is yes. A pivot point gives traders a better idea of market moves and volatility, which can improve decision-making about when to enter and exit the market.
3. What are pivot points R1, R2 and R3?
These designations refer to resistance levels, which lie above the pivot point in increasing succession. They show the level of resistance that prevents the price from rising higher.