Understanding the Pivot Point: A Trader’s Compass

What Is a Pivot Point?

In technical analysis, a pivot point is a calculated price level that acts as a compass for intraday traders. Derived from the previous session’s high, low, and close, it forecasts potential support and resistance zones. Because it blends historical data with forward-looking insights, the pivot point is prized for its simplicity and reliability.

How to Calculate the Pivot Point

To find the main pivot point (PP), add the high, low, and close, then divide by three. From this central value, you generate support (S1, S2) and resistance (R1, R2) levels:

PP = (High + Low + Close) / 3
R1 = (2 × PP) − Low
S1 = (2 × PP) − High
R2 = PP + (High − Low)
S2 = PP − (High − Low)

Automated charting platforms calculate these instantly, but knowing the formula helps traders grasp market structure.

Why Pivot Points Matter

Unlike moving averages that lag, pivot points provide fixed price markers for the entire trading day. Day traders rely on them to spot breakouts, gauge sentiment, and place precise entry or exit orders. When price trades above the pivot, bullish momentum is implied; trading below signals bearish pressure.

Practical Trading Strategies

Bounce Strategy

Traders look for price to approach a pivot level and then "bounce" away. Confirmation from candlestick patterns or volume spikes enhances the setup’s reliability.

Breakout Strategy

If price slices through R1 or S1 with strong volume, it may continue toward R2 or S2. Setting stop-loss orders just beyond the broken level helps manage risk.

Pivot with Indicators

Combining pivot points with RSI or MACD can filter false signals. For example, a bullish RSI divergence near S1 strengthens a potential long trade.

Tips for Effective Use

1. Customize to the session you trade—Forex traders often use 24-hour GMT data.
2. Back-test pivot strategies on historical charts.
3. Pair with disciplined risk management to avoid emotional decisions.

Conclusion

Mastering the pivot point equips traders with a clear, objective map of intraday price action. Whether you trade stocks, forex, or futures, adding this timeless tool to your toolkit can sharpen entries, refine exits, and enhance overall performance.