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Definition: Pivot Point
In financial markets, pivot point is a technical analysis indicator used by traders to determine the broad trend of the market along different time frames. The pivot point is calculated simply by the average of the high, low and closing prices of the previous trading day. On the following day, trading above the pivot point is considered to indicate current bullish sentiment, while if trading below, the pivot point indicates a bearish sentiment.
A pivot point analysis is frequently used in combination with calculating support and resistance levels, like a trend line analysis. The pivot point and the accompanying support and resistance levels are generally turning points for the price movement direction in a market. In an increasing market, the pivot point and the resistance levels may signify a ceiling level in price beyond which the uptrend is no longer supportable and a direction change may occur. In a falling market, a pivot point and the support levels may denote a resistance to further decline in the market and a subsequent change in the direction. If the market is flat or directionless, the prices may oscillate greatly around the level of pivot point only until a price escape develops. Trading above or below the pivot point directs toward the overall market sentiment. It is a leading indicator which provides advanced signs of potential new market highs or lows within a particular time frame.
The support and resistance levels along with the pivot point and the width of the previous market may be used as exit points during trading, but they are rarely used as entry signals. For example, if the market is on a rise and crosses over the pivot point, upon touching the first resistance level it is wiser to close a position, as the probability of reversal due to resistance increases greatly.