Pivot

What

Pivot Point analysis is used by some because it is a predictive, as opposed to lagging, indicator. It therefore uses the price from the previous period to calculate the probable support and resistance lines of the current period. Although it is mainly used in forex trading there are good reasons to be aware of it for indices and equities trading.

How

Pivot Point = (previous days high + previous days low + previous days close)/3

1st Support Line = (2*Pivot Point) – previous days high

1st Resistance Line = (2*Pivot Point) – previous days low

2nd Support Line = Pivot Point – (previous days high – previous days low)

2nd Resistance line = Pivot Point + (previous days high – previous days low)

When

When calculating pivot points, the pivot point itself is the primary support/resistance. This means that the largest price movement is expected to occur at this price. The other support and resistance levels are less influential, but may still generate significant price movements.

Pivot points can be used in two ways. The first way is for determining overall market trend: if the pivot point price is broken in an upward movement, then the market is bullish, and vice versa. Keep in mind, however, that pivot points are short-term trend indicators, useful for only one period until they need to be recalculated. The second method is to use pivot point price levels to enter and exit the markets. For example, a trader might put in a stop order to buy 100 shares if the price breaks a resistance level. Alternatively, a trader might set a stop-loss for his active trade if a support level is broken.