Pivot Points Part 1: Understanding the Pivot

Welcome to this two-part series on one of the oldest and most reliable tools in short-term trading: pivot points.

First developed in the trading pits of Chicago, pivot points gave traders a quick and consistent way to identify potential turning points for the trading day. Despite the evolution of markets from open-outcry to electronic trading, pivot points have stood the test of time. They remain a valuable tool for traders, providing a clear roadmap to navigate intraday price action.

In Part 1, we’ll focus on the pivot point itself—what it is, why it’s so effective, and three ways to incorporate it into your trading. In Part 2, we’ll build on this foundation by delving into the support and resistance levels derived from the pivot.

What Is the Pivot Point?

At its core, the pivot point is a calculated price level based on the previous session’s high, low, and close:

Pivot Point (PP) = (High + Low + Close) / 3

This level acts as the day’s central reference point, dividing the market into two zones. Prices trading above the pivot point generally suggest bullish sentiment, while prices below it indicate bearish sentiment.

Day traders use the pivot point to gauge market bias for the session. If the price opens above the pivot and holds there, it often signals that buyers are in control. Conversely, if the price opens below the pivot and stays below it, sellers likely dominate.

The pivot point frequently acts as a magnet for price action, with the market often testing it multiple times during the day. This dynamic adaptation to the prior session’s activity makes it especially useful for short-term traders seeking actionable levels.

Pivot Point: S&P 500 5min Candle Chart

Past performance is not a reliable indicator of future results

The Key Advantage: Objectivity

One of the standout features of pivot points is their objectivity. Unlike other technical tools that rely on subjective settings or interpretations, pivot points are calculated using a straightforward formula. This standardisation is a crucial advantage because it ensures that many traders are watching the same levels.

This widespread attention gives pivot points their strength. They act as a universal benchmark, creating a self-reinforcing cycle: when many traders anticipate reactions around a pivot point, the likelihood of significant price action at that level increases.

This objectivity also benefits newer traders by providing a clear, consistent framework for interpreting price movements. Pivot points eliminate guesswork, allowing traders to focus on developing strategies around reliable levels.

Three Ways to Use the Pivot Point in Your Trading

1. Developing a Bias

Where the price opens relative to the pivot point can set the tone for the session. In markets with a defined open and close, such as equities, the opening price’s position above or below the pivot point is a key indicator of sentiment.

For 24-hour markets like forex, the calculation is based on the high, low, and close from the New York session—the most significant closing price. While the opening price in these markets is less critical, understanding where the Asian session has traded relative to the pivot can provide valuable insights into sentiment and potential momentum for the day ahead.

Example: Tesla

In the below example, Tesla opens the session by gapping through the pivot point on the open. This is then followed by a period of consolidation above the pivot point – setting a bullish bias for the session.

Tesla 5min Candle Chart

Past performance is not a reliable indicator of future results

2. Recognising Price Patterns Around the Pivot

Price action around the pivot point can reveal important trading opportunities:

• Bounce: A strong bounce off the pivot suggests it’s being respected as a significant level, often leading to continuation in the direction of the bounce.

• Break and Retest: If the price breaks through the pivot and then retests it as support (in an uptrend) or resistance (in a downtrend), it can offer a reliable entry point.

• Choppy Action: Repeated crossings of the pivot without clear direction indicate indecision—often a signal to step back and wait for clearer trends to emerge.

Combining these price patterns with candlestick signals, like bullish engulfing patterns or bearish pin bars, can add further confidence to your setups.

Example:

Here we see a classic ‘break and retest’ pattern form around the pivot on the FTSE 100 5min candle chart. Having initially held the pivot as support, the market breaks below the pivot and the retraces to retest – using the pivot as resistance and creating a well-defined short setup.

FTSE 100 5min Candle Chart

Past performance is not a reliable indicator of future results

3. Enhancing Context with VWAP

Combining pivot points with the Volume-Weighted Average Price (VWAP) can give traders an additional layer of confirmation. Both tools are objective, widely used, and calculated from historical price data, making them a natural pairing.

If both the pivot point and VWAP align as support or resistance, it strengthens the level’s importance.

Divergence between the two can provide insight into whether short-term momentum might conflict with longer-term trends.

By blending these tools, traders gain a more comprehensive view of market dynamics.

Example:

In this example we see price action on EUR/USD across two days. The first day sees the market make steady gains as prices hold above the daily pivot and VWAP. The second day shows a more mixed start with prices chopping back and forth on either side before finally establishing a foothold above VWAP and the daily pivot – leading to steady gains during European trading.

EUR/USD 5min Candle Chart

Past performance is not a reliable indicator of future results

Final Thoughts

The pivot point is more than just a calculated level—it’s a bridge between historical price action and current sentiment. Its simplicity, objectivity, and widespread use make it an indispensable tool for day traders. Whether you’re gauging market bias, identifying key price patterns, or combining it with other tools like VWAP, the pivot point provides a solid foundation for making informed decisions.

In Part 2 of this series, we’ll explore how the support and resistance levels derived from the pivot point have the potential to add further precision to your short-term trading.

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.

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