Pivot Points Part 2: Support and Resistance Levels

Welcome back to our series on pivot points, an objective a simple tool used by many day traders.

In Part 1, we explored the central pivot point, its calculation, and its role as a key reference for market sentiment. In Part 2, we’ll expand on this foundation by diving into the support and resistance levels derived from the pivot point formula. These levels are designed to add depth to your day trading analysis, offering a more comprehensive view of intraday price action.

The Mechanics: Support and Resistance Levels

In addition to the central pivot point (PP), pivot analysis includes three levels of support (S1, S2, S3) and three levels of resistance (R1, R2, R3). These levels are calculated using the previous session’s high, low, and close. The formulas for the primary levels are as follows:

PP = (previous high + previous low + previous close) / 3

S1 = (pivot point x 2) - previous high

S2 = pivot point - (previous high — previous low)

R1 = (pivot point x 2) — previous low

R2 = pivot point + (previous high — previous low)

The third levels (R3 and S3) extend even further but are less frequently reached in typical intraday trading. These levels create a structured framework for identifying potential reversal points, breakout zones, and profit targets.

S&P 500 5min Candle Chart

Past performance is not a reliable indicator of future results

Using Pivot Levels in Your Trading

1. Trading the Reversal: Support and Resistance in Action

One of the most common ways to use pivot levels is to identify potential reversal points. For example, if the price reaches S1 or R1 and shows signs of hesitation, it may indicate a reversal is likely. This is particularly true when combined with candlestick patterns, momentum indicators, or divergence on oscillators like RSI.

Example:

In this EUR/USD 5-minute chart, we see a textbook reversal at R1. The market initially uses the pivot point (PP) as support and then forms a double top reversal pattern when retesting R1 resistance, signalling a potential upward move. This setup allows traders to enter with a clear stop above R1 and a target near the pivot point or dynamic moving average.

EUR/USD 5min Candle Chart

Past performance is not a reliable indicator of future results

2. Riding the Breakout

When momentum is strong, the market can break through pivot levels, turning resistance into support (or vice versa). Watching for breakouts at R1 or S1 can provide excellent entry points for trend-following strategies.

Example:

In this example, the FTSE 100 having earlier reversed at R1 and broken through PP, briefly consolidates near S1. This is followed by a break lower – triggering a swift move down to S2.

FTSE 100 5min Candle Chart

Past performance is not a reliable indicator of future results

3. Target Setting and Risk Management

Pivot levels are also useful for setting realistic profit targets and stop losses. For example, a trader entering a long position near S1 might use the pivot point as an initial target, depending on the strength of the move.

Similarly, a short position initiated near R1 could aim for the pivot point as an initial target and S1 as a secondary target, with stops placed just above the breakout level to manage risk.

Combining Pivot Levels with Other Tools

While pivot levels are powerful on their own, combining them with other tools can significantly enhance their effectiveness:

VWAP: If a pivot level aligns with VWAP, it reinforces the level’s importance as a potential support or resistance zone.

Prior Days High/Low: Pivot levels that coincide with the previous session’s high or low can serve as stronger reversal or breakout points.

RSI: Use RSI to gauge momentum—if price approaches a pivot level while RSI is negative or positive divergence at an overbought or oversold, it can signal a potential reversal.

Example:

In the below example we see the FTSE hold above VWAP and the pivot level – forming a solid base of support before breaking higher. The market breaks through R1 and the prior days high leading to a charge past R2 to and towards R3. At R3 we see the market start to stall as the RSI shows signs of negative divergence.

FTSE 100 5min Candle Chart

Past performance is not a reliable indicator of future results

Summary

Pivot points, along with their associated support and resistance levels, offer traders a structured framework for navigating intraday price action. By understanding how these levels interact with market sentiment and momentum, traders can develop more confident strategies for reversals, breakouts, and risk management.

Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing