Pivot points

Levels from yesterday

Long ago, floor traders stood in a crowded trading pit and shouted their orders. They had no computers on the floor, so they needed quick levels to watch each morning. They used three numbers from yesterday: the high, the low and the close. Mix them with simple math, and you get pivot points.

The formulas

The classic version:

• Pivot (P) = (High + Low + Close) ÷ 3
• R1 = 2 × P - Low
• S1 = 2 × P - High
• R2 = P + (High - Low)
• S2 = P - (High - Low)

"R" stands for resistance, a possible ceiling. "S" stands for support, a possible floor.

Work one out

Yesterday a stock had a high of $13, a low of $6 and a close of $11.

• Pivot: (13 + 6 + 11) ÷ 3 = 30 ÷ 3 = $10
• R1: 2 × 10 - 6 = 20 - 6 = $14
• S1: 2 × 10 - 13 = 20 - 13 = $7
• R2: 10 + (13 - 6) = 10 + 7 = $17
• S2: 10 - (13 - 6) = 10 - 7 = $3

So you'd have five lines ready before the market even opens: $17, $14, $10, $7 and $3.

How traders read them

• Above or below P. If price opens and stays above the pivot, some traders say the day is leaning up. Below the pivot, leaning down.
• Targets and turning spots. Price climbing from P often slows near R1. Price falling from P often slows near S1. Day traders use these as places to take profit or watch for a turn.
• Breaks. If price pushes through R1 and stays above it, R2 becomes the next level to watch.

Daily pivots use yesterday's numbers. Some traders also use weekly or monthly pivots, made from last week's or last month's high, low and close.

Where it fails

• They're just math. The levels don't know about today's news. A big announcement can send price flying past every line.
• Lots of lines. With P, R1, R2, S1 and S2 (and some apps add R3 and S3), price is almost always near some line, so it's easy to believe they "worked."
• Different recipes. There are other pivot formulas that give different levels, so not everyone is watching the same lines.

Like Fibonacci, pivots work best as zones that many traders watch, especially when they land near a real support or resistance level on the chart.

Remember

• Pivot P = (High + Low + Close) ÷ 3, using yesterday's numbers.
• R1 = 2P - Low. S1 = 2P - High.
• Day traders watch them as possible turning spots and targets.
• They're just math from yesterday, so news can blow right through them.