Trader Toolkit: Pivot Points

With the ever-increasing number of  trading platforms and the growing allure of low-to-no-fee brokerages, new traders are confronted with a deluge of options when it comes to trading and investing. But lost in the promises of sleek interfaces and free shares for signing up is the fact that successful trading takes time, practice and an understanding of resources experienced traders use on a daily basis.

Using the charts and tools available on the Webull trading app, which offers zero-commission trading and a suite of advanced trading analysis and charting, the Trader Toolkit series of articles will aim to explore the ratios, indicators and signals that play an integral role in how traders generate ideas and form convictions on their medium- or short-term trades.

There’s obviously no way to “know” whether a stock has reached either its floor or ceiling. But there are tools available to help traders anticipate where these invisible boundaries may lie, and pivot points are among the most straight-forward.

Before getting into the mechanics of pivot points, it’s important to understand the logic by which they operate. Specifically, the tendency of stocks to trade within support and resistance levels. Take a look at this six-month chart for JPMorgan Chase & Co. JPM

A cursory glance at the candle chart shows that the stock has bounced between a low of about $105 and a high of about $116 over the past six months. This represents a medium-term look at which JP Morgan’s support and resistance levels.

With regard to the $105 support level: the stock’s recent pattern of rising in price once it’s reached $105 indicates there are enough buyers of JP Morgan at that price that it would take a lot of selling pressure to drop it below that level.

In the case of the $116 resistance level, which it recently broke in September: there were (until recently) enough traders looking to sell their stake in JPMorgan once it hit $116 that there wasn’t enough buying pressure to push the stock very far above that price.

This support and resistance dynamic can be applied to all different timeframes, from one hour to one decade, and traders of all stripes, from technical to fundamental, pay attention to where their stocks are in relation to these levels.

Although the example above is fairly easy to observe with just a glance, eyeballing a price chart is a fairly imprecise way of determining support and resistance and intraday charts are not always so easily identified.

Which is where pivot points come in. Before delving into how they’re calculated, take a look at the six-month chart for JPMorgan overlayed with two-week pivot points.

While there are a lot of things to take in on this chart, the breakdown is relatively straightforward. Each two-week period is marked by five different price levels: two support (S1, S2), two resistance (R1, R2) and the level between the upper and lower pivot points (P).

Another benefit to pivot points is that these levels are calculated using only a few numbers. Depending on the chosen timeframe, traders need only find the high (H), low (L) and close (C) from the previous period of the same length. Once those numbers are found, traders need only plug them into the formulas below to arrive at the pivot points mentioned above.

P= (H + L + C) ÷ 3

S1= P - (H - L)

S2= (P x 2) - H

R1= P + (H - L)

R2= (P x 2) - L

Functionally, pivot points serve to illustrate the rough guideposts the stock could reasonably be expected to follow. Of course, those guides are based on how the stock has previously behaved, and any number of things could alter a stock’s trajectory.

Therefore, pivot points should only be used to inform a trader where buying and selling pressure has been the strongest recently. With that in mind, and supplementing them with additional research or technical indicators, pivot points can be and excellent reference tool for novice and veteran traders alike.

Webull is a content partner of Benzinga