What is a Pivot?
A pivot is a significant price level known in advance that traders consider important and can make trade decisions around that level. Like a technical indicator, a pivot price is similar to a resistance or support level. If the pivot level is breached, the price should continue in that direction. Or the price could reverse at or near this level.
Key points to remember
- A pivot is an important price level for a trade on a chart.
- Pivot points are calculated levels that indicate whether a trader should be bullish or bearish, as well as providing potential profit goals.
- Pivots and Pivot Points provide traders with information about the next direction the price might take, help them make trade decisions, or generate trade signals.
What does a pivot tell you
There are pivots and pivot points. These terms can mean different things to different people.
A pivot signifies an important price level for a trader, such as an inflection point, where he expects the price to continue in the current direction or reverse. Some traders view previous highs or lows in price as a pivot. A trader can view the 52 week high as a pivot point. If the moves above, the trader expects the price to continue to rise. But if the price falls back below the previous 52-week high, they can exit their position, for example. A pivot can happen at any time.
A pivot can be any area that a trader considers important, such as a weekly high or low, a daily high or low, a swing high/low, or a technical level.
Pivot points are calculated levels. Floor traders originally used a pivot point to establish important price levels, and these are now used by many traders. After analyzing historical price data for the stock, a pivot point is used as a guide as to how the price may move. Further calculations provide support and resistance levels around the pivot point. Pivot points can be calculated based on different timeframes, thus providing information for day trading, swing tradersand investors.
When the price is above a pivot point it is considered bullish, when it is below the pivot point it is considered bearish. Levels above the pivot point are calculated and called R1 and R2, with R representing resistance. The levels below the pivot point are calculated and called S1 and S2, with S standing for Support.
If the price breaks below the pivot point, it can continue to S1. If the price falls below S1, it can continue to S2. The same concept applies to R1 and R2.
How to Calculate a Pivot
A pivot does not require calculation. This is just an important price zone for the trader to watch.
Pivot points have a calculation. Today’s pivot level calculations are based on yesterday’s high, low and close prices.
To calculate a weekly pivot, the high, low and close would be used based on the previous week. To calculate a monthly pivot, the high, low and close would be used for the previous month.
Example of using a pivot
Swing traders who focus on growth stocks will often view the 52 week high as a pivot, especially after a significant correction.
On the following chart, Apple Inc. (AAPL) peaked at $233.47. This was followed by a decline of over 35%. The price eventually rallied back to the former high. Traders watched the level and bought as the price crossed it. The price continued to rise.
This will not always happen when the price continues to rise after hitting the previous 52-week high. This tends to happen more in strong companies where traders are looking for an opportunity to buy.
Note that the price had already risen for quite some time before hitting the 52-week high and breaking it. Therefore, while the pivot is important, there may have been other technical or fundamental methods that signaled a trader to enter at a better/lower price than the 52-week pivot.
The Difference Between a Pivot and Fibonacci Retracements
These two levels are usually drawn on the chart. Fibonacci retracements are levels calculated based on the duration of the price change. Therefore, they will usually provide levels to watch relative to pivots or pivot points. Fibonacci retracements show how far the price can pull back
Limitations of the use of pivots
Whether you use pivot or pivot points, there will always be other levels that are also important. Focusing only on levels can mean other opportunities are missed.
Pivots and pivot points are best used in conjunction with other forms of analysis
Pivots and Pivot Points, while important, can be skewed causing traders to be lost or confused. For example, price can move back and forth across the pivot point, moving a trader from bullish downward and back again. After crossing a pivot point, the price may not move to the next expected level, such as R1 or S1.