What Is a Pivot Point in Stock Trading?

Understanding Pivot Points in Stock Trading

A pivot point is a predictive indicator in financial markets, derived from a security’s previous trading period’s high, low, and closing prices. These levels indicate future support and resistance, helping traders gauge market sentiment and identify potential price turning points. Originally used by floor traders, pivot points are now a widely adopted tool in technical analysis.

Understanding the Basic Pivot Point

A pivot point is not a single price level but rather a system comprising a central pivot and several associated support and resistance levels. The central pivot point, often labeled PP, is the primary reference point calculated from the previous period’s price data. This central point acts as a balance level, suggesting that prices trading above it indicate bullish sentiment, while prices below it suggest bearish sentiment.

Accompanying the central pivot are three levels of support, designated as S1, S2, and S3, and three levels of resistance, labeled R1, R2, and R3. These support levels are prices where a falling trend might pause or reverse, indicating potential buying interest. Conversely, resistance levels are prices where a rising trend might halt or reverse, signaling potential selling pressure. Levels further from the central pivot are considered more significant.

Standard Pivot Point Calculation

The standard pivot point calculation uses the high, low, and closing prices from the previous trading period. The central pivot point (PP) is determined by averaging these prices.

The formula for the central pivot point is:
PP = (High + Low + Close) / 3

Once the central pivot point is established, support and resistance levels are calculated systematically. The first resistance level (R1) is calculated by multiplying the central pivot point by two and subtracting the previous period’s low. Similarly, the first support level (S1) is calculated by multiplying the central pivot point by two and subtracting the previous period’s high.

The formulas for the first levels are:
R1 = (2 PP) – Low
S1 = (2 PP) – High

Subsequent levels build upon these calculations, using the central pivot point and the range between the high and low. The second resistance level (R2) is calculated by adding the central pivot point to the difference between the previous period’s high and low. The second support level (S2) is calculated by subtracting the difference between the previous period’s high and low from the central pivot point.

The formulas for the second levels are:
R2 = PP + (High – Low)
S2 = PP – (High – Low)

Finally, the third resistance level (R3) is calculated by adding the central pivot point to twice the difference between the previous period’s high and low. The third support level (S3) is calculated by subtracting twice the difference between the previous period’s high and low from the central pivot point. These levels provide increasingly distant potential turning points for price action.

The formulas for the third levels are:
R3 = High + 2 (PP – Low)
S3 = Low – 2 (High – PP)

For example, if the previous day’s high was $105, the low was $95, and the close was $100, the central pivot point (PP) would be ($105 + $95 + $100) / 3 = $100. Using this PP, R1 would be (2 $100) – $95 = $105, and S1 would be (2 $100) – $105 = $95. R2 would be $100 + ($105 – $95) = $110, and S2 would be $100 – ($105 – $95) = $90. R3 would be $105 + 2 ($100 – $95) = $115, and S3 would be $95 – 2 ($105 – $100) = $85.

How Traders Use Pivot Points

Traders use pivot points to identify potential support and resistance zones. When a security’s price approaches a pivot level, traders observe price action for signs of a bounce or a breakthrough. A price moving above the central pivot point often signals a bullish bias, while a price falling below it indicates a bearish outlook.

These levels help determine potential entry and exit points for trades. For instance, a trader might buy if the price bounces off a support level, anticipating upward movement. Conversely, a trader might sell if the price is rejected at a resistance level, expecting downward movement. Stop-loss orders can also be placed just beyond these pivot levels to limit potential losses if the market moves unfavorably.

Pivot points can also indicate trend strength. If price consistently respects and bounces off pivot levels, it suggests a strong trend. However, if price breaks through multiple pivot levels with conviction, it might signal a trend reversal or significant momentum. Traders often combine pivot points with other technical indicators, such as moving averages or oscillators, to confirm signals and increase signal reliability.

Common Variations of Pivot Points

Beyond the classic calculation, several other pivot point formulas have gained popularity, each with unique methods. These variations emphasize different aspects of previous price data or use alternative calculations to derive the levels. While their core purpose is to identify potential support and resistance, their specific calculations lead to different price points.

Fibonacci Pivot Points incorporate Fibonacci retracement and extension levels. After calculating the central pivot, Fibonacci multiples of the previous day’s range are added or subtracted to derive support and resistance levels. This method blends pivot points with Fibonacci ratios.

Woodie’s Pivot Points give more weight to the previous day’s closing price. It calculates the central pivot differently, deriving support and resistance from this weighted pivot and the previous day’s range. This emphasis reflects recent market sentiment more strongly.

Camarilla Pivot Points are designed to provide tighter, more immediate support and resistance levels. They use a complex formula that heavily weights the previous day’s close and range, resulting in levels closer to the current price. Day traders frequently use Camarilla levels for short-term opportunities due to their proximity to current price action.

References

1. Barchart.com. “Pivot Point Calculator & Formula.” Accessed August 21, 2025.