A pivot point is a crucial turning point in the price of a stock or security that many traders tend to trade around.
It is basically a price at which the stock stops going up or down and reverses in the opposite direction. It’s the price at the forefront of a rally.
Pivot points can only be accurately identified after the fact, because you must have a price action following the pivot point to know if it is in fact a pivot point.
How to Find Pivot Points?
There are two views on pivot points in trading: technical and free.
Find Pivot Points Through Quantitative Resources
The technical definition of a pivot point defines a pivot point very clinically:
- A pivotal low is a price bar (candlestick) at which both the previous and subsequent lows are higher than the low of this bar.
- A pivot high is a price bar (candle) at which both the previous and subsequent highs are lower than the maximum of this bar.
While the technical definition and use of pivot points is useful for creating indicators and scripts that automatically identify pivot points as they appear, it is very noisy, you get a lot of pivot points that are not actually pivot points.
Therefore, most marketers who use pivot points as part of their methodology choose to identify pivot points through a mix of automated and voluntary means.
Most map packs will have built-in indicators that automatically identify pivot points. Often they are simply called “Pivot Points”, with the points marked with labels such as “S1” and “R1”, meaning support and resistance.
Another great source for pivot points are indicators that identify periodic highs like Donchian Channels that allow you to draw bands around price that present periodic highs, most often 20- and 50-day highs, but experiment.
For example, let’s look at some pivot points generated by TradingView’s “Stock Pivot Points – High and Low” indicator on Apple stock (AAPL):
Find Pivot Points Through Discrete Resources
For practical purposes, a pivot point is simply a local extreme in price action, which represents a short-term reversal.
Identifying these extremes does not have to be a rigid and systematic process. It can be as simple as marking the most obvious turning points on the diagram.
An exercise that we love and will mention further in this article is to print out a blank diagram and start marking the obvious pivot points. Do this over and over again and make it a habit. When analyzing a diagram on your computer, simply use a drawing tool from your map platform to mark the obvious pivot points you see on the diagram. Next, compare your results with a quantitative measure as a pivot point indicator. You may have missed some insignificant pivot points, but be aware of any significant pivot points you may have missed.
Why Use Pivot Points?
Support and Resistance
A lot of people talk about support and resistance but don’t really have a practical explanation why it should or should work. It is often quite wavy. Learning to identify pivot points and looking at the price action around them can give you a much better understanding of the fundamentals of support and resistance.
Ultimately a support or resistance level is a point at which either supply or demand is unbalanced. On support, an imbalance of buyers comes and buys aggressively, which quickly pushes up the price of the support level.
Pivot points represent changes in the market; they once functioned as points of unbalanced supply or demand and therefore have a high probability of doing so again. The stock market is made up of human traders, and human traders have a memory of recent significant trading levels and will change their trading performance around these levels.
One of the best reasons to get acquainted with pivot points is because they often serve as significant points of support and resistance.
Swing traders are mostly trying to take one small “swing” out of a price move, rather than playing for the long-term trend. Many of these swing traders will spend their time analyzing the cyclical nature at which ups and downs are formed in stocks, and pivot points are a key factor for this.
One simple but powerful exercise involves marking several pivot points on a diagram and then linking them to each other, forming a series of ups and downs. You’ll often find that you’ve revealed a rhythm to the price action of that stock that wasn’t previously apparent. The rhythm of the swing cycle was obscured by all the random price noise.
At its most basic, a trend is a series of higher highs and higher lows, or lower lows and lower highs. These highs and lows that you use to analyze a trend are, most often, pivot points in themselves.
Therefore, you can use your pivot points to analyze a trend in a different way. Rather than looking at tools like moving averages or oscillators like the Middle Direction Index that give you an idea of the “slope” of the trend, pivot points give you a mechanical reading of what is actually happening.
Often stocks can have a significant up or down drift in one direction without actually establishing a trend pattern on the trading time frame. In other words, the moving averages and oscillators could tell you that something is trending and is a buy, while a more rigorous analysis of the pivot points could show that the trend pattern has broken in front of several bars.
An excellent example is below in $ XLE the energy ETF:
The 50-day moving average shouts a “strong trend,” while the price action around the decisive pivot points tells a different story. The pivots are marked with black arrows, and as you can see, the price stalled around the highest pivot high in November, constantly failing to break high, before finally making a lower pivot low and breaking the trend pattern.
If you get one thing out of this article, it’s that levels like pivot points tend to provide more reliable support and resistance levels than those that look like “traditional” support and resistance levels, which are levels that price visits multiple times.
Pivot point analysis is very simple conceptually but actually using it to make money is a completely different story. As we have always warned, it is important not to fall victim to shiny object syndrome and to add tools such as pivot analysis to your business toolbox until it has a very specific use and reason for its role within your business system.