How Pivot Points Work in the Stock Market: A Brief Guide

How Pivot Points Work in the Stock Market: A Brief Guide

Pivot points are one of the most commonly used tools in technical analysis. Traders and investors use them to identify potential support and resistance levels in the stock market. Originally developed by floor traders, pivot points are now widely used across various markets—including stocks, forex, and commodities.

What Are Pivot Points?

A pivot point is a calculated average of the high, low, and closing prices from the previous trading day. It acts as a benchmark level to gauge the market's direction. Based on the pivot point, several support (S1, S2…) and resistance (R1, R2…) levels are derived.

Basic Pivot Point Formula: Pivot Point (P)=High+Low+Close3\text{Pivot Point (P)} = \frac{\text{High} + \text{Low} + \text{Close}}{3}

From this main pivot point, the following levels are calculated:

First Support (S1) = (2 × Pivot Point) − High

First Resistance (R1) = (2 × Pivot Point) − Low

Second Support (S2) = Pivot Point − (High − Low)

Second Resistance (R2) = Pivot Point + (High − Low)

How Traders Use Pivot Points

Identifying Market Sentiment:

If the price stays above the pivot point, it indicates bullish sentiment.

If the price stays below the pivot point, it suggests bearish sentiment.

Setting Entry and Exit Points:

Traders often buy near support levels (S1, S2) and sell near resistance levels (R1, R2).

Breakout Trading:

If the price breaks above R1 or below S1 with volume, it could indicate a trend continuation.

Intraday Trading Tool:

Pivot points are especially popular for intraday traders, as they offer quick reference levels for short-term moves.

Benefits of Using Pivot Points

Simple to calculate and apply

Works well with other indicators like RSI or MACD

Effective in ranging and trending markets

No need for complex software—many charting platforms calculate them automatically

Limitations

Not 100% accurate—should be used with confirmation indicators

Best suited for short-term or intraday trading, not long-term investing

Can be less effective in highly volatile markets

Conclusion

Pivot points are a valuable tool for understanding key price levels in the stock market. While simple in calculation, they offer significant insights into potential support and resistance zones. When combined with other technical tools and proper risk management, pivot points can enhance your trading strategy and decision-making.