Floor Trader Pivots are a set of intraday support and resistance levels that represent points of resistance and areas where price reversals are more likely to occur. It was originally developed by floor traders (“local”) in the trading pits of the equity futures exchanges in Chicago.
The pivot levels are calculated using the prior day’s High, Low, Open, and Close. The center level is called the “Daily Pivot” and is calculated as follows: P = (H + L + C) / 3. The Daily Pivot is the weakest of the levels and generally represents the dividing line between a bullish day and a bearish day. The rest of them can be referred to as "levels" or "pivot levels".
Below the Daily Pivot level are the support levels. The main support levels are S1, S2 and S3 (see the chart above). Likewise there are three major resistance levels above the Daily Pivot known as R1, R2 and R3:
The pivot levels attract price to them and when price gets there we get a reaction. When the price pauses at a pivot level it will generally pivot away by reversing back where it came from or accelerate as it passes through it. If it passes through it then it will likely go to the next pivot level. If it gets close to a level but is reluctant to touch it then it is very likely to reverse back.
There are some observations that we can make based on these pivot levels: Do not put on a short trade when the price is above R2. Do not put on a long trade when the price is below S2. The first time the market touches S1 is bullish if the price velocity is slowing and it is in the first 30 minutes that the market is open. After 30 minutes you can still trade the first touch for up to an hour after the market open if it touches S1 gently.
If you have an unusually wide range day then the next day will have much wider spacing on the pivot levels, which will render them much less effective. Wide range days are frequently followed by days that are much narrower in range so you may only get an interaction with just one pivot level -and that may not amount to any useful trading opportunities.
Conversely if you have an unusually narrow range day then the next day will have much narrower spacing on the pivot levels. However, narrow days are often followed by more narrow days and the narrow levels that are produced are still tradable, but they are less strong.
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