Pivot points are another tool or indicator that can be used to help in trading. They are used to identify potential levels of support or resistance. Pivot points are considered to be a leading indicator. As with all indicators, it’s best to use it along with other indications to give a better idea of how we should interpret what is likely to happen.
Using the charts provided by http://stockcharts.com , pivot points can be accessed from the Overlays section below the chart. Pivot points are calculated based on the high, low, and close of the previous period, depending on what time frame you are looking at. The daily charts will be calculated based on the prior month’s information. The weekly charts will be determined based on the prior year’s data.
When you choose pivot points and update the chart, it identifies the pivot point or starting point from which potential support or resistance levels are identified. It also lists 2 additional potential support and resistance levels identified as S1 and R1, S2 and R2, as you move farther away from the pivot point. They are identified with horizontal lines drawn on the chart and the price level specified. Remember these points are identified as potential levels of support or resistance, so we can be aware of these levels as they are approached. A whole new set of pivot points will be determined at the beginning of a new period, so March pivot points have just been established based on February’s data when looking at the daily charts.
There are some variations of the pivot points’ calculations. One variation is based off of the Fibonacci sequence. To access this, type the letter F in the parameters and update the chart. The pivot point will be the same as originally calculated, but the support and resistance levels will be slightly different. The biggest difference is that 3 levels of support and resistance will be identified, and be closer to the pivot point, than when using the default or Standard calculation, which will have the levels more spread out.
When using pivot points, prices tend to move within the pivot lines acting as support and resistance. If prices break to a new level, then look for prices to now move within the next level between the 2 pivot lines. With any indicators, any major news announcements are not expected to follow typical rules.
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