Pivot Points: A Quick-Reference Tool for Intra-Day Trading
Pivot points are quick-reference tools that traders use in intra-day trading to give themselves benchmarks and perspective while short-term price movements occur. These points are used to identify potential support and resistance levels in the market, which can help traders make more informed decisions about when to enter or exit a trade.
Pivot points are based on the high, low, and close price levels of a stock market index or individual security for the previous day or week. Traders use these levels to set support and resistance levels by multiplying the high, low, and close prices by simple factors.
These factors can be very simple, such as 2x or 3x, or they can be based on Fibonacci numbers. Fibonacci numbers are a sequence of numbers where each number is the sum of the two preceding ones. For example, the first few Fibonacci numbers are 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on. Traders who use Fibonacci numbers to calculate pivot points may use factors such as 0.382, 0.618, and 1.618 to determine potential support and resistance levels.
Pivot points were originally used by floor traders, who would calculate them manually on a piece of scratch paper. Because pivot points are so simple to calculate, they remain a popular tool among traders today.
There are several different types of pivot points, including traditional pivot points, Woodie's pivot points, Camarilla pivot points, and Fibonacci pivot points. Each type of pivot point uses a slightly different formula to calculate potential support and resistance levels.
Traditional Pivot Points
Traditional pivot points are the most commonly used type of pivot point. To calculate traditional pivot points, traders start by calculating the pivot point itself. The pivot point is simply the average of the high, low, and close prices from the previous trading day. Traders then calculate potential support and resistance levels by multiplying the pivot point by simple factors.
For example, if the pivot point is 100 and the high, low, and close prices from the previous day were 105, 95, and 98, respectively, a trader might calculate potential support and resistance levels as follows:
Woodie's Pivot Points
Woodie's pivot points are similar to traditional pivot points, but they place more weight on the close price from the previous day. To calculate Woodie's pivot points, traders start by calculating the pivot point itself as the average of the high, low, and close prices from the previous day. Traders then calculate potential support and resistance levels by multiplying the pivot point by simple factors and adding or subtracting a certain amount based on the previous day's close price.
Camarilla Pivot Points
Camarilla pivot points are another type of pivot point that places more weight on the close price from the previous day. To calculate Camarilla pivot points, traders start by calculating the pivot point itself as the average of the high, low, and close prices from the previous day. Traders then calculate potential support and resistance levels based on a series of formulae that take into account the previous day's range and close price.
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