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How to Calculate Pivot Points in Stocks

Original post by Slav Fedorov of Demand Media

A pivot point on a stock chart is the price level at which a major move of significance can start. Pivots can be either a reversal or continuation of a trend. A reversal pivot is the level at which a stock is likely to change direction from up to down or vice versa. A continuation pivot is the level from which a stock's advance would resume in the same direction after a period of consolidation, or basing. Pivots are important in stock trading because they are considered the best points at which to buy stocks. It takes training and experience to determine and calculate pivot points.

Step 1

Learn basic stock chart patterns. Each chart pattern has a potential pivot which can only be determined correctly if an investor is familiar with the pattern.

Step 2

Obtain a daily stock chart for the stock you are considering and examine it to identify the most recent pattern forming on the right-hand side of the chart.

Step 3

Draw imaginary or actual lines that delineate the pattern. A stock moving above the upper boundary of a pattern constitutes a breakout -- the beginning of a move of significance, and the best moment to buy.

Step 4

Determine the point on the pattern that would signify a breakout if the stock moves through it, and the associated price. Depending on the pattern, it may or may not be the highest price for a specified preceding period, but it will almost always be the price at which the stock previously stopped and reversed while forming the pattern's upper boundary.

Step 5

Add 10 cents to the price -- that's your pivot. If the stock moves through the pivot on high volume, it validates the pivot and the breakout.

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Tips & Warnings

• Watch the stock's daily trading volume during a breakout. If the stock moves through a pivot on low volume, the breakout may be weak and have a high probability of failure.
• Use printed charts or online charting services to draw lines that help you to analyze chart patterns and identify correct pivots.

References

• "How to Make Money in Stocks"; William O'Neil; 2009
• "Technical Analysis of Stock Trends"; Robert D. Edwards, John Magee; 2010