Pivot Points and Their Importance

CA Manish Singh: 

Hello everyone, and welcome to Chapter 11. Today we will learn what Pivot Points are, how they are calculated, how support and resistance levels are automatically generated, and how traders use these levels to judge market pauses, breakouts and intraday reversals. 

What This Chapter Covers: How Pivot Points Help You Read the Market 

CA Manish Singh: 

Earlier, we discussed how support and resistance levels form when price repeatedly reacts at certain zones. Pivot Points work on the same idea. The only difference is that Pivot Points calculate these levels automatically, based on how the market traded during the previous session. 

Pivot Points take into account: 

• Where the market paused
• Where it reversed
• Where it faced buying or selling pressure
• Where large volumes were traded 
  These factors help the system generate meaningful support (S1, S2, S3) and resistance (R1, R2, R3) levels for the next day. 

This allows traders who struggle with drawing their own levels to use Pivot Points as a ready-made support and resistance map. 

Plotting Pivot Points on the Chart 

CA Manish Singh: 

To plot Pivot Points, you simply go to Indicators, search for Pivot Points, and select Pivot Point Standard. As soon as you apply it, you will see a central Pivot level (P), along with: 

• R1, R2, R3 
  These indicate Resistance 1, Resistance 2 and Resistance 3.
• S1, S2, S3 
  These indicate Support 1, Support 2 and Support 3. 

You may also see R4 and R5, or S4 and S5, but these are extremely rare and generally occur during unusually volatile market days. 

To avoid clutter, I recommend keeping only S1 to S3 and R1 to R3 visible. These three levels are sufficient for nearly all intraday decisions. 

How Pivot Points Update Each Day 

CA Manish Singh: 

Pivot Points refresh automatically based on the previous day’s price range. 
For example: 

• The central Pivot level represents the average of the previous day’s significant price points.
• Resistances (R1, R2, R3) are plotted above the Pivot.
• Supports (S1, S2, S3) are plotted below the Pivot. 

Each trading day starts with a fresh set of calculated levels. 

If the price opens above the Pivot, the market is relatively stronger. 
If the price opens below the Pivot, the market begins the day with weakness. 

How the Market Reacts Around Pivot Levels 

CA Manish Singh: 

Pivot Points help you judge how far the market can move during a typical trading day. 

For example: 

• Most days, price moves between S1 to S2 or between R1 to R2.
• Reaching R3 or S3 is much less common.
• R4 and R5, or S4 and S5, are extremely rare and usually occur only during events such as budgets, global crises or unexpected news. 

If you notice how price behaves around these zones, you will understand the psychology: 

At Resistance Levels (R1, R2, R3): 

• Price may struggle to break through.
• The market may take multiple attempts.
• This is why double tops and triple tops form. 

At Support Levels (S1, S2, S3): 

• The first test is the strongest.
• If support breaks cleanly in one attempt, the market often continues downward.
• A third retest of support is very rare, which is why double bottoms and triple bottoms are uncommon. 

Real-World Use Case: How Traders Apply Pivot Points 

CA Manish Singh: 

If you are not confident drawing manual support and resistance lines, Pivot Points give you a ready structure. 

For example: 

• If the market approaches R1, you prepare for a possible reversal.
• If R1 breaks, the next probable target becomes R2.
• If the market approaches S1, you prepare for a bounce or breakdown.
• If S1 breaks decisively, S2 becomes the next target. 

The logic is simple. Use the levels as reference points and take decisions based on how the market behaves around them. 

Pivot Points remove guesswork and help you stay consistent. 

Summary and Takeaways 

• Pivot Points automatically calculate support and resistance levels for you.
• R1, R2 and R3 act as logical upside hurdles.
• S1, S2 and S3 act as downside support zones.
• Most markets move only between S1 and S2 or between R1 and R2 in a typical day.
• Support usually breaks in one or two attempts. Resistance can be tested more times.
• If you are not confident drawing your own levels, Pivot Points are an excellent alternative.
• Practising with Pivot Points improves accuracy and decision-making. 

Please revise this chapter as these concepts will be used again when we study Relative Strength in the next chapter. 

Disclaimer Investments in securities markets are subject to market risks. Read all related documents carefully before investing.