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Pivot point

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A pivot point is a price level of significance in technical analysis of a financial market that is used by traders as
a predictive indicator of market movement. A pivot point is calculated as an average of significant prices (high,
low, close) from the performance of a market in the prior trading period. If the market in the following period
trades above the pivot point it is usually evaluated as a bullish sentiment, whereas trading below the pivot point
is seen as bearish.

Monthly pivot point chart of the Dow Jones Industrials Average for the first 8 months of 2009, showing sets of first and
second levels of resistance (green) and support (red). The pivot point levels are highlighted in yellow. Trading below the
pivot point, particularly at the beginning of a trading period sets a bearish market sentiment and often results in further price
decline, while trading above it, bullish price action may continue for some time.

It is customary to calculate additional levels of support and resistance, below and above the pivot point,
respectively, by subtracting or adding price differentials calculated from previous trading ranges of the market.
A pivot point and the associated support and resistance levels are often turning points for the direction of price
movement in a market. In an up-trending market, the pivot point and the resistance levels may represent a
ceiling level in price above which the uptrend is no longer sustainable and a reversal may occur. In a declining

market, a pivot point and the support levels may represent a low price level of stability or a resistance to further
decline.[1]
Contents
[hide]

1 Calculation
2 Support and resistance levels
3 Trading tool
4 See also
5 References

[edit]Calculation
Several methods exist for calculating the pivot point (P) of a market. Most commonly, it is the arithmetic
average of the high (H), low (L), and closing (C) prices of the market in the prior trading period[2]:
P = (H + L + C) / 3.
Sometimes, the average also includes the previous period's or the current period's opening price (O):
P = (O + H + L + C) / 4.
In other cases, traders like to emphasize the closing price, P = (H + L + C + C) / 4, or the current
periods opening price, P = (H + L + O + O) / 4.

[edit]Support

and resistance levels

Price support and resistance levels are key trading tools in any market. Their roles may be
interchangeable, depending on whether the price level is approached in an up-trending or a downtrending market. These price levels may be derived from many market assumptions and conventions.
In pivot point analysis, several levels, usually three, are commonly recognized below and above the
pivot point. These are calculated from the range of price movement in the previous trading period,
added to the pivot point for resistances and subtracted from it for support levels. [3]
The first and most significant level of support (S1) and resistance (R1) is obtained by recognition of the
upper and the lower halves of the prior trading range, defined by the trading above the pivot point
(H P), and below it (P L). The first resistance on the up-side of the market is given by the lower

width of prior trading added to the pivot point price and the first support on the down-side is the width
of the upper part of the prior trading range below the pivot point.

R1 = P + (P L) = 2P L

S1 = P (H P) = 2P H

Thus, these levels may simply be calculated by subtracting the previous low (L) and high (H) price,
respectively, from twice the pivot point value:[4]
The second set of resistance (R2) and support (S2) levels are above and below, respectively, the first
set. They are simply determined from the full width of the prior trading range (H L), added to and
subtracted from the pivot point, respectively:

R2 = P + (H L)

S2 = P (H L)

Commonly a third set is also calculated, again representing another higher resistance level (R3) and a
yet lower support level (S3). The method of the second set is continued by doubling the range added
and subtracted from the pivot point:

R3 = H + 2(P L)

S3 = L 2(H P)

This concept is sometimes, albeit rarely, extended to a fourth set in which the tripled value of the
trading range is used in the calculation.
Qualitatively, the second and higher support and resistance levels are always located symmetrically
around the pivot point, whereas this is not the case for the first levels, unless the pivot point happens
to divide the prior trading range exactly in half.

[edit]Trading

tool

The pivot point itself represents a level of highest resistance or support, depending on the overall
market condition. If the market is directionless (undecided), prices will often fluctuate greatly around
this level until a price breakout develops. Trading above or below the pivot point indicates the
overall market sentiment. It is a leading indicator providing advanced signaling of potentially new
market highs or lows within a given time frame.[4]

The support and resistance levels calculated from the pivot point and the previous market width may
be used as exit points of trades, but are rarely used as entry signals. For example, if the market is uptrending and breaks through the pivot point, the first resistance level is often a good target to close a
position, as the probability of resistance and reversal increases greatly.

5-day pivot point chart of the SPDR Gold Trust (GLD) for intra-day trading in October 2009

Many traders recognize the half-way levels between any of these levels as additional, but weaker
resistance or support areas.[5] The half-way (middle) point between the pivot point and R1 is
designated M+, between R1 and R2 is M++, and below the pivot point the middle points are labeled
as M and M. In the 5-day intra-day chart of the SPDR Gold Trust (above) the middle points can
clearly be identified as support in days 1, 3, and 4, and as resistance in days 2 and 3.

Formation of candlestick
Further information: Candlestick chart
Candlesticks are graphical representations of price movements for a given period of time. They
are commonly formed by the opening, high, low, and closing prices of stock.

If the opening price is above the closing price then a filled (normally red or black) candlestick is
drawn.
If the closing price is above the opening price, then normally a green or a hollow candlestick
(white with black outline) is shown.
The filled or hollow portion of the candle is known as the body or real body, and can be long,
normal, or short depending on its proportion to the lines above or below it.
The lines above and below, known as shadows, tails, or wicks represent the high and low price
ranges within a specified time period. However, not all candlesticks have shadows.
[edit]Simple

patterns
Simple patterns[hide]

Big Black Candle Has an unusually long


black body with a wide range between
high and low. Prices open near the high
and close near the low. Considered
abearish pattern.

Big White Candle Has an unusually long


white body with a wide range between
high and low of the day. Prices open near
the low and close near the high.
Considered a bullish pattern.

Black Body Formed when the opening


price is higher than the closing price.
Considered to be a bearish signal.

Doji Formed when opening and closing


prices are virtually the same. The lengths
of shadows can vary.

Dragonfly Doji Formed when the


opening and the closing prices are at the
highest of the day. If it has a longer lower
shadow it signals a more bullish trend.
When appearing at market bottoms it is
considered to be a reversal signal.

Gravestone Doji Formed when the


opening and closing prices are at the
lowest of the day. If it has a longer upper
shadow it signals a bearish trend. When it
appears at market top it is considered a
reversal signal.

Long-Legged Doji Consists of a Doji


with very long upper and lower shadows.
Indicates strong forces balanced in
opposition.

Hanging Man A black or a white


candlestick that consists of a small body
near the high with a little or no upper
shadow and a long lower tail. The lower
tail should be two or three times the height
of the body. Considered a bearish pattern
during an uptrend.

Hammer A black or a white candlestick


that consists of a small body near the high
with a little or no upper shadow and a
long lower tail. Considered a bullish
pattern during a downtrend.

Inverted Black Hammer A black body in


an upside-down hammer position. Usually
considered a bottom reversal signal.

Inverted Hammer A black or a white


candlestick in an upside-down hammer
position.

Long Lower Shadow A black or a white


candlestick is formed with a lower tail that
has a length of 2/3 or more of the total
range of the candlestick. Normally
considered a bullish signal when it appears
around price support levels.

Long Upper Shadow A black or a white


candlestick with an upper shadow that has
a length of 2/3 or more of the total range
of the candlestick. Normally considered a
bearish signal when it appears around
price resistance levels.

Marubozu A long or a normal candlestick


(black or white) with no shadow or tail.
The high and the lows represent the
opening and the closing prices. Considered
a continuation pattern.

Shooting Star A black or a white


candlestick that has a small body, a long
upper shadow and a little or no lower tail.
Considered a bearish pattern in an
uptrend.

Spinning Top A black or a white


candlestick with a small body. The size of
shadows can vary. Interpreted as a neutral
pattern but gains importance when it is part
of other formations.

White Body Formed when the closing


price is higher than the opening price and
considered a bullish signal.

Shaven Bottom A black or a white


candlestick with no lower tail. [Compare
withInverted Hammer.]

Shaven Head A black or a white


candlestick with no upper shadow.
[Compared withhammer.]

[edit]Complex

patterns
Complex patterns[hide]
Bearish Harami Consists of an
unusually large white body followed by

Bearish Harami Cross A large white

a small back body (contained within

body followed by a Doji. Considered

large white body). It is considered as a

as a reversal signal when it appears

bearish pattern when preceded by an

at the top.

uptrend.

Bearish 3-Method Formation A long


black body followed by three small
bodies (normally white) and a long
black body. The three white bodies are
contained within the range of first black
body. This is considered as
a bearish continuation pattern.

Bullish 3-Method
Formation Consists of a long white
body followed by three small bodies
(normally black) and a long white
body. The three black bodies are
contained within the range of first
white body. This is considered as a
bullish continuation pattern.

Bullish Harami Consists of an


unusually large black body followed by

Bullish Harami Cross A large black

a small white body (contained within

body followed by a Doji. It is

large black body). It is considered as a

considered as a reversal signal when

bullish pattern when preceded by a

it appears at the bottom.

downtrend.
Dark Cloud Cover Consists of a long
white candlestick followed by a black
candlestick that opens above the high
of the white candlestick and closes well
into the body of the white candlestick. It
is considered as a bearish reversal
signal during an uptrend.

Engulfing Bearish Line Consists of


a small white body that is contained
within the followed large black
candlestick. When it appears at top it
is considered as a major reversal
signal.

Evening Doji Star Consists of three


candlesticks. First is a large white
Engulfing Bullish Line Consists of a
small black body that is contained
within the followed large white
candlestick. When it appears at bottom
it is interpreted as a major reversal
signal.

body candlestick followed by a Doji


that gap above the white body. The
third candlestick is a black body that
closes well into the white body. When
it appears at the top it is considered
as a reversal signal. It signals more
bearish trend than the evening star
pattern because of the doji that has
appeared between the two bodies.

Evening Star Consists of a large white


body candlestick followed by a small

Falling Window A window (gap) is

body candlestick (black or white) that

created when the high of the second

gaps above the previous. The third is a

candlestick is below the low of the

black body candlestick that closes well

preceding candlestick. It is

within the large white body. It is

considered that the window should be

considered as a reversal signal when it

filled with a probable resistance.

appears at top level.

Morning Doji Star Consists of a large


black body candlestick followed by

Morning Star Consists of a large

a Doji that occurred below the

black body candlestick followed by a

preceding candlestick. On the following

small body (black or white) that

day, a third white body candlestick is

occurred below the large black body

formed that closed well into the black

candlestick. On the following day, a

body candlestick which appeared

third white body candlestick is formed

before the Doji. It is considered as a

that closed well into the black body

major reversal signal that is more

candlestick. It is considered as a

bullish than the regular morning star

major reversal signal when it appears

pattern because of the existence of the

at bottom.

Doji.
On Neckline In a downtrend, Consists
of a black candlestick followed by a
small body white candlestick with its
close near the low of the preceding
black candlestick. It is considered as a
bearish pattern when the low of the
white candlestick is penetrated.

Three Black Crows Consists of three


long black candlesticks with
consecutively lower closes. The
closing prices are near to or at their
lows. When it appears at top it is
considered as a top reversal signal.

Tweezer Bottoms Consists of two or


Three White Soldiers Consists of

more candlesticks with matching

three long white candlesticks with

bottoms. The candlesticks may or

consecutively higher closes. The

may not be consecutive and the sizes

closing prices are near to or at their

or the colours can vary. It is

highs. When it appears at bottom it is

considered as a minor reversal signal

interpreted as a bottom reversal signal.

that becomes more important when


the candlesticks form another pattern.

Tweezer Tops Consists of two or more


candlesticks with matching tops. The

Doji Star Consists of a black or a

candlesticks may or may not be

white candlestick followed by a Doji

consecutive and the sizes or the

thatgap above or below these. It is

colours can vary. It is considered as a

considered as a reversal signal with

minor reversal signal that becomes

confirmation during the next trading

more important when the candlesticks

day.

form another pattern.

Piercing Line Consists of a black

Rising Window A window (gap) is

candlestick followed by a white

created when the low of the second

candlestick that opens lower than the

candlestick is above the high of the

low of preceding but closes more than

preceding candlestick. It is

halfway into black body candlestick. It

considered that the window should

is considered as reversal signal when it

provide support to the selling

appears at bottom.

pressure.