Pivot Points Explained

Pivot points are widely used in the stock market as a technical analysis tool to determine potential support and resistance levels. Traders and analysts use them to anticipate price movements and make informed decisions on entry and exit points. While they are particularly popular among intraday traders, pivot points can be applied across different time frames and asset classes.

A pivot point is a calculated level based on the high, low, and closing prices of the previous trading session. It acts as a central reference point for traders, helping to identify whether the market sentiment for the next session is likely to be bullish or bearish.

The standard pivot point formula is:

• Pivot Point (PP) = (High + Low + Close) ÷ 3

This central pivot is often accompanied by multiple support (S1, S2, S3) and resistance (R1, R2, R3) levels, which are calculated using the PP value.

Pivot points are often applied to identify potential support and resistance levels in trading. For instance, if a stock trades above its pivot point, it may indicate a stronger sentiment, while trading below it can signal weaker sentiment. Traders also look at support and resistance levels derived from pivot points to observe possible price movements within a session. These examples help in understanding how pivot points function in real market scenarios.

Here’s a step-by-step example using the standard method:

1. Identify the High, Low, and Close Prices from the previous session.
   

   • High: ₹120
     

   • Low: ₹110
     

   • Close: ₹115
     

2. Calculate the Pivot Point (PP):
   

   • PP = (120 + 110 + 115) ÷ 3 = 115
     

3. Calculate Support and Resistance Levels:
   

   • R1 = (2 × PP) − Low = (2 × 115) − 110 = 120
     

   • S1 = (2 × PP) − High = (2 × 115) − 120 = 110
     

   • R2 = PP + (High − Low) = 115 + (10) = 125
     

   • S2 = PP − (High − Low) = 115 − (10) = 105
     

These levels then act as possible price turning points in the current trading session.

While the standard formula is the most commonly used, other variations include:

• Fibonacci Pivot Points – Uses Fibonacci retracement levels for finer analysis.
  

• Camarilla Pivot Points – Focuses on smaller intraday ranges.
  

• Woodie’s Pivot Points – Gives more weight to the closing price.
  

Each method serves a slightly different trading style, but the principle remains the same: using past market data to predict possible price levels.

Traders consider pivot points significant because:

• Prices often react around these levels.
  

• They help determine intraday trends.
  

• They offer objective, data-driven reference points.
  

When prices trade above the PP, sentiment is generally seen as bullish; when below, bearish sentiment may be assumed.

In intraday trading, pivot points can be used to:

• Identify potential trade entries.
  

• Set stop-loss orders just below support or above resistance levels.
  

• Determine profit targets at the next pivot level.
  

For example, if the price breaks above R1 with strong volume, a trader might look for a potential move towards R2.

Pivot points work best when used alongside other technical tools such as:

• Relative Strength Index (RSI) – Confirms overbought/oversold conditions.
  

• Moving Average Convergence Divergence (MACD) – Assesses momentum shifts.
  

• Volume Analysis – Validates breakouts or reversals.
  

Combining multiple signals can improve the reliability of pivot-based trading decisions.

Here’s why traders often rely on pivot points in their market analysis:

• Simple to calculate and interpret.
  

• Provide clear, predefined support and resistance levels.
  

• Useful across multiple asset classes including equities, commodities, and forex.
  

• Objective and not prone to personal bias.
  

Here are a few drawbacks to keep in mind when using pivot points:

• Less effective during highly volatile or news-driven markets.
  

• Do not guarantee reversals or breakouts.
  

• Should not be used in isolation without confirming signals.

Pivot points are a valuable tool for traders seeking to anticipate market movements, especially in intraday trading. By calculating support and resistance levels based on past data, traders may make more informed decisions. However, they should be used in conjunction with other technical indicators and risk management practices for the best results.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.