by Amanda Harvey
A pivot point indicator calculates a price level or pivot point line based on an average of the previous session’s trading data. The prices used to determine the pivot point are most commonly the high, low and close from the preceding trading period. Typically a pivot point indicator also depicts two levels of support and resistance below and above the pivot point line. The pivot point is a type of leading indicator, which means that it is used to predict levels at which the future price is most likely to experience significant movement.
Time Frames for Calculating Pivot Points
The time frame of the chart to which pivot points are being applied determines the period from which data is obtained. Shorter charts for durations between one and fifteen minutes utilize price data from the previous day. This means that once the pivot points are calculated, they remain set for the entire trading day.
To calculate pivot points for charts with a time frame of thirty or sixty minutes, price data from the preceding week is used. This means that the pivot points for these charts do not change until the beginning of the following trading week, at which time new data is available and new pivot points may be determined.
Daily charts use data from the preceding month, and therefore, the pivot points calculated on the 1st of any month will continue to be applicable until the beginning of the following month.
Pivot points for a weekly or monthly chart is based on data from the preceding year, and is valid for the whole year.
How to Calculate the Pivot Point Indicator
The simplest type of pivot points are referred to as Standard Pivot Points. The center line, or pivot point is calculated as an average of the previous period’s data; in other words, high plus low plus close divided by three (H+L+C) ÷3 = PP.
The first support line below the pivot point is obtained by subtracting the high from the product of the pivot point multiplied by two (PP×2) – H = S1. A second support level is determined by subtracting the difference of the high minus the low from the pivot point PP - (H-L) = S2.
The first resistance line above the pivot point is calculated by subtracting the low from the product of the pivot point multiplied by two (PP×2) – L = R1. The second resistance level is obtained by adding the difference of the high minus the low to the pivot point PP + (H-L) = R2.
What Can Be Interpreted from the Pivot Point Indicator?
The pivot point indicator can provide signals based around the pivot point line itself, and also the lines of support and resistance.
One of the simplest premises is that if the price is moving above the pivot point, a bullish sentiment is in evidence, whereas if the price action is taking place below the pivot point, this suggests bearish tendencies.
Very often, the beginning of a substantial movement in price begins with the crossing of the pivot point.
If prices reach the second levels of support or resistance and then stabilize this may provide an indication that a subsequent reversal in direction of price movement is likely. As with the use of any indicators, confirmation of this imminent change in direction should be obtained before acting on the signal interpreted. Candlestick reversal chart patterns, and other indicators including RSI or MACD can be used effectively for verifying signals generated by the pivot points.
The pivot point indicator is a popular leading indicator which is calculated with simple statistics from the previous trading period. It can offer signals as to whether a price is trading in a bearish or bullish manner, and also the likely points at which the price will undergo a change in direction.