In short: a Pivot Point is a trend analyser by looking at the high, low and closing price from the previous trading session.
A Pivot Point is a popular indicator commonly used by technical traders to determine the overall market trends, as well as potential support/resistance levels over different time frames. Floor traders–the original day traders–are credited with being the first to use Pivot Points to set key levels. At the beginning of each day, they would look the previous day’s High, Low and Close to calculate support and resistance levels for the current day’s trading.
Pivot Points for EUR / USD Chart
Pivot Points act as a leading/predictive indicator in that on the subsequent day, trading that goes above the Pivot Point is considered a bullish signal, while trading that goes below it is considered a bearish signal. In Pivot Trading, the general trend is that if the market opens above or below the pivot, the price action has a strong tendency to remain above/below the pivot for that trading session.
Keeping this in mind, as it allows you to avoid much of the market noise that may show up later in the day. On the other hand, if the market opens or trades at extreme support or resistance levels, it has a general tendency to trade back to the pivot. Traders should remember this to avoid buying high or selling low even as the price moves away from the pivot.
The Opening, High, and Closing Prices are used to calculate Pivot Points based on the chart’s timeframe.
Short-term timeframes of less than 15 minutes use data from the previous day; medium-term charts (30-minute and 60-minute) use data from the previous week, while daily charts use data from the previous month. Meanwhile, weekly and monthly charts use data from the previous year.
From: “Stocks to trade and StockCharts“
