How Do Pivot Points Work? Explained : Price Analyses

How Do Pivot Points Work? Explained

Pivot points are perhaps the simplest tools you can use in your technical toolbox.

To quickly summarize the importance of pivot points: when the price is trading above its pivot it’s said to a buying signal, when price is below its pivot it’s a sell signal.

Based on the last day’s trading, pivot points unearth the current day’s support and resistance levels, as well as the “pivot,” which is the average of both. Another thing that pivot points do is help us set price targets.

Let’s take a look at a graph to illustrate.

How to use Pivot Points for Stocks, Forex, and Cryptocurrency Trading

Looking at the above chart, we can see that price is just over its pivot point at $56.82 and is beginning to trend higher to its resistance at $61.02.

If this were a real trade, I would place a buy order at $57 and my sell order at $60. That price target would then give me a 5% gain — not too bad for a single order.

Besides helping us with our position sizes and discovering support and resistance zones, pivot points help in one other way.

When the price exceeds its resistance for the first time, the psychology of buyers are sellers are tested. If the bulls come out on top, the price will stay above the resistance zone and head for R2 (resistance two). Resistance one will then become a new support level for bulls to defend moving forward.

Pivot Point Calculations

There are numerous ways of calculating pivot points for a given period. The pivot points below are some of the most common that you’ll find in trading software.

Classical or standard pivot point
Based on the last period’s high, low, and closing prices. Calculates the first pivot as an average of these prices along with support and resistance zones.

Camarilla Pivot point
Identical to classical pivot points with the exception of how the support and resistance levels are calculated.

Woodie’s Pivot Point
Places more emphasis on the closing price for yesterday’s period. Also, the way that support and resistance areas are calculated is different.

Fibonacci Pivot Point
Uses Fibonacci numbers for calculating support and resistance. Fibonacci numbers come in the following allotments: 23.6%, 38.2%, 50%, and 61.8%, and 100%.

Pivot Point Formula

The most widely accepted calculation for pivot points is below. 

  • P = (H + L + C) / 3

The pivot is calculated by the security’s high, low, close and divided by three.

The next formulas calculate the support and resistance zones based on the pivot point from the last calculation.

  • R1 = P + (P − L) = 2*P − L
  • S1 = P − (H − P) = 2*P − H

In the above calculations, R1 and S1 are resistance and support respectively. The support and resistance areas are often expanded to include more than one set of calculations. Thus, you can have second and third support and resistance zones.

  • R2 = P + (H − L)
  • S2 = P − (H − L)

The third pivot point resistance areas are below:

  • R3 = H + 2*(P − L) = R1 + (H − L)
  • S3 = L − 2*(H − P) = S1 − (H − L)

Pivot Point Calculators

To make the job of calculating pivot points easier for you, there are a number of free online pivot point calculators that will streamline the process. A selection of calculators from various online sources is below.

Matthew North

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