Pivot Points represent levels that are used by floor traders to determine directional movement and potential support/resistance levels. They became popular once traders on the floor exchanges began to use them.
A pivot point is a price at which the direction of price movement changes. It is calculated using data from the previous trading day. By analyzing the high, low, and close of the day, floor traders were able Predict price support and resistance and to calculate the next day’s pivot point, as well as potential support and resistance levels.
Traders can use pivot points to anticipate where prices may find support or resistance in the next trading session because it is an accurate indicator, as the most market participants are watching and trading these key levels. Part of what makes the Pivots Points so reliable is the fact that they are based purely on price. Pivot points are especially useful to short-term traders who are looking to speculate small price movements (scalping).
The central Pivot Point represents the intraday point of balance between the buyers and sellers and is usually where the largest amount of trading volume takes place. The reason is that the floor-traders are using the central Pivot Point as the main level of the day and most market orders are usually placed between the Pivot Point (PP) and the first levels of support (S1) and resistance (R1).
When traders/investors place their order into a specific market, the price will often exceed the first levels of support (S1) and resistance (R1) and will move on to test the second and third levels (S2, S3 and R2, R3).
When the price exceeds a level of support or resistance, this will affect the rest of the trading day, as floor traders will adjust their intraday valuations of the price. A break of a support or resistance level will have a pronounced effect on when and where a rally or a pullback would occur.
The main reason why the Pivot Points are working so well on a trading chart is that many traders are tracking the S/R levels and are executing their orders when price approaches each specific level.
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