What are pivot points?

Take yesterday's high, low and close on EUR/USD. With a few lines of arithmetic, those three prices give you a ladder of levels for today before the first trade of the session. Those levels are pivot points.

Traders treat them as ready-made support and resistance, prices where buying or selling may show up. Anyone using the same three prices gets the same levels, which is a large part of their appeal.

How is the pivot point calculated?

The central level is the pivot point, written P. It is the plain average of the previous period's high, low and close:

P = (High + Low + Close) ÷ 3

From P and the previous high and low, further formulas build three resistance levels above it, R1, R2 and R3, and three support levels below it, S1, S2 and S3.

R1 and S1 sit closest to P, and each higher number sits further out.

This version is usually called the standard or classic pivot. Fibonacci and Camarilla pivots use the same three inputs with different multipliers, and the next lesson compares them.

The method is often said to come from floor traders in futures pits, who wanted levels they could work out by hand before the open.

Working out a full set of levels on EUR/USD

Say yesterday EUR/USD made a high of 1.10600, a low of 1.09800 and closed at 1.10350. These are round illustrative prices.

1. Add the three prices: 1.10600 + 1.09800 + 1.10350 = 3.30750.
2. Divide by three: 3.30750 ÷ 3 = 1.10250. That is P.
3. Work out yesterday's range: 1.10600 − 1.09800 = 0.00800, which is 80 pips.

The other six levels come from P, the high, the low and the range:

1. R1 = 2 × 1.10250 − 1.09800 = 2.20500 − 1.09800 = 1.10700.
2. S1 = 2 × 1.10250 − 1.10600 = 2.20500 − 1.10600 = 1.09900.
3. R2 = 1.10250 + 0.00800 = 1.11050.
4. S2 = 1.10250 − 0.00800 = 1.09450.
5. R3 = 1.10600 + 2 × (1.10250 − 1.09800) = 1.10600 + 0.00900 = 1.11500.
6. S3 = 1.09800 − 2 × (1.10600 − 1.10250) = 1.09800 − 0.00700 = 1.09100.

The levels are unevenly spaced. R1 is as far above P as yesterday's low was below it, 45 pips, and S1 is as far below P as yesterday's high was above it, 35 pips.

A close near the top of yesterday's range lifts P, and every other level moves up with it.

Yen pairs follow the same steps, but a pip there is 0.01. Suppose USD/JPY made a high of 151.20, a low of 149.90 and closed at 150.70.

Then P = 451.80 ÷ 3 = 150.60, R1 = 301.20 − 149.90 = 151.30 and S1 = 301.20 − 151.20 = 150.00. R1 sits 70 pips above P and S1 sits 60 pips below it.

The pivot point calculator runs these sums for any pair, so you can check your own figures against it.

Which high, low and close go into the formula?

The period you feed in decides the period the levels cover. Yesterday's prices give daily pivots for today. Last week's prices give weekly pivots, and last month's give monthly pivots.

A longer period usually has a wider range, so its levels sit further apart. In the example above, neighbouring daily levels were 35 to 45 pips apart, while monthly levels can be hundreds of pips apart.

Forex trades around the clock on weekdays, so there is no single closing bell. Your daily high, low and close depend on when your chart's daily candle starts and ends.

A widely used convention ends the forex day at 17:00 New York time. Some brokers set their server clock so the daily candle closes then, while others use a different cut-off and get different candles, and so different pivots.

The Sunday candle is a related trap. If the market reopens on Sunday evening in your chart's time zone, a midnight cut-off gives a Sunday candle of only a few hours, and Monday's pivots built from it can mislead you.

Once the period closes, the levels stay fixed until the next one. They do not shift with each new candle the way a moving average does.

How do traders read the levels?

Most uses of pivots are conventions, habits that many chart readers share. None of them is a rule the market has to follow.

• Price trading above P is often read as a lean toward buyers for the day, and price below P as a lean toward sellers.
• R1 and S1 are watched for a stall or a reversal, like any other support or resistance. Treat each as a zone a few pips wide, since price rarely turns at the exact digit.
• A level can mark a target or a place for a stop loss. A buyer near S1 might aim for P and put the stop below S2, which is an example of the logic and nothing more.
• A clean break through R1 or S1 shifts attention to the next level out.

The same level can lead to either outcome. In the left panel below, price climbs from P, pokes 2 pips above R1 and falls back. In the right panel, it pushes through R1 and keeps rising.

Nothing in the formula tells you in advance which of those two days you are having. The lesson on trading with pivot points looks at setups for both cases and how traders try to tell them apart.

Where do pivot points fall short?

Pivots use three prices from the last period and nothing else. They know nothing about today's news or the direction of the longer trend.

The usual argument for them is that they are self-fulfilling: if enough traders watch the same levels, orders gather there. That is plausible, but solid public evidence that pivot levels hold more often than randomly picked levels is limited.

With seven daily levels, plus weekly and monthly sets, price is almost always near some pivot. That makes it easy to spot a bounce after the fact and easy to forget the levels price ignored.

On days with major economic releases, price can travel through several levels in minutes. A level that held on quieter days offers no protection when the news surprises the market.

Different data and different formulas also give different ladders. Before you compare your levels with anyone else's, confirm that both use the same high, low, close and method.