A pivot point is a technical analysis indicator used to determine the overall trend of the stock for the next trading day. The pivot point itself is simply the average of the high, low and closing price from the previous trading day.
Pivot Point: P = (High + Low + close) /3
On the next day, if trading is above the pivot point , it indicates the day is bullish or positive. If trading is below the pivot point, it indicates the day is bearish or negative.
The pivot point is the basis indicator. There are four other support and resistance levels that are calculated based on the pivot point. They are S1, S2, R1, and R2, which stand for support level one and two, and resistance level one and two. All these levels help traders see where the price could experience support or resistance.
Resistance Level 1: R1 = (P x 2) – Low;
Resistance Level 2: R2 = P + (High -Low);
Support Level 1: S1 = (P x 2) – High;
Support Level 2: S2 = P – (High – Low);
Pivot points are an intra-day indicator for trading futures and stocks. This means traders can use the levels to help plan out their trading in advance. If the price is above the pivot point, they will be buying. S1, S2, R1, and R2 can be used as target prices for such trades.
Pivot points are only indicators. As with all indicators, they are only for the analysis guidances.