Pivot Point
Definition
A pivot point is a price level calculated before the session from the prior day's high, low and close; the classic formula is (high + low + close) divided by 3, with resistance (R1, R2) and support (S1, S2) levels derived from it.
Example
“Yesterday's high, low and close put today's pivot at 50.00, R1 at 51.00 and S1 at 49.00.”
Detailed Explanation
Classic floor pivots use: R1 = 2 x PP minus the prior low, S1 = 2 x PP minus the prior high, R2 = PP plus the prior range, and S2 = PP minus the prior range. Because every trader using the same formula gets the same numbers, the levels are known before the open and many traders watch them.
Day traders use pivots in two ways: fading the first touch of R1 or S1 on a quiet, range-bound day, or trading a decisive break through a level on a trending day. The levels have no special power of their own. A pivot matters more when it lines up with another level such as the prior day's high or VWAP, and it should be skipped on days with a large overnight gap that makes the prior day's numbers stale.
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