What are Pivot Levels?

Pivot level is an unique intraday tool that is valuable during intraday trading. This tool is popularly used on OHLC charts. Pivot means a turning point. Therefore, it is a level that can act as an area of value where important price formation or price action can take place.

When plotted on Intraday TF of 15-min or 5-min, this tool shows seven lines: 1 Pivot level, 3 Support levels, and 3 Resistance levels. These lines act as reference points when trading on intraday basis.

Calculation of Pivot levels.

Pivot levels are easy to calculate. It should be noted that the Pivot levels are calculated based on the data points of the previous day’s candle on Daily TF. The following formula considers the data of previous day’s candle

• Resistance 3 = Resistance 1 + (High-Low)

• Resistance 2 = Pivot level + (High-Low)

• Resistance 1 = (Pivot level*2) - Low

• Pivot level = (High + Low + Close) / 3

• Support 1 = (Pivot level*2) - High

• Support 2 = Pivot level - (High-Low)

• Support 3 = Support 1 - (High-Low)

The calculation method of Pivot level is such that the sequence of lines will always be R1-> R2-> R3 above Pivot level and S1->S2->S3 below Pivot level.

It is important to remember that these levels are only reference points.

“How to use Pivot levels?”- Its simple

Pivot levels can be used in 3 ways:

1. Comparing Current Pivot Level to Previous Pivot Level.

2. Comparing current Price to Pivot Level

3. Support and Resistance lines

If the Current Pivot Level is above the previous Pivot level, it is known as a Positive Bias and interpreted as bullish sentiment. If the Current Pivot level is below the precious Pivot level, it is known as a Negative bias and interpreted as bearish sentiment.

If the current price is above the current Pivot level, the price could be considered to be in a bullish trend. If the current price is below the current Pivot level, the price could be considered to be in a bearish trend.

Pivot Levels are more popularly used for their Support and Resistance levels. These levels have been useful time and again. When there is Support and Resistance involved, one can also incorporate Principle of Polarity.

Putting all these together,

• If the Pivot level suggest positive bias, the lines are narrow, and the price is above the pivot level, the price can be considered to be in a bullish trend.

• If the Pivot level suggest negative bias, the lines are narrow, and the price is below the pivot level, the price can be considered to be in a bearish trend.

Observe in the above chart of AMBUJACEM as to how well Pivot level is working on 15 min TF. Also observe how well the support and resistance levels are working as important Area of Value.

Only some of the use cases of Pivot level are discussed here. Plot them on the charts, and observe them during the market sessions and EOD basis to build more understanding of the indicator.

I have further discussed this concept in my video so make sure you check it out.