The term 'Pivotal Points' is included in the Investments edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
Pivotal Points refers to a system for predicting stock price movements that Jesse Livermore created and developed. Time Magazine described him as the most incomparable living American trader of his day. In the 1920’s, he used the system to amass a fortune that at its peak valued $100 million. As a share of the U.S. GDP of the time, this amounts to $14 billion in current dollars as measured against today’s GDP.
This represented the first time that any investor had documented using Pivotal Points. Livermore famously wrote about it in his book, Reminiscences of a Stock Operator. These Pivotal Points are so useful because more than 90 years after Jesse created them investors still utilize and teach them.
Pivotal Points are the levels at which stock prices find support and resistance. In fact they are the primary levels of both support and resistance, depending on whether they are higher or lower than the price of the stock. Because of the importance of these Pivotal Points, they are the levels where the greatest price movement generally happens. There may be other resistance and support levels. Other levels are less important than the pivotal ones.
There are two principal ways that Pivotal Points are utilized today as they were in the 1920’s when Livermore first created them. In the first case, investors can employ them to decide what the general market trend is. Market trend is important because it tells investors which way the market is generally moving.
Should the Pivotal Point price be broken to the upside, then the stock or market proves to be bullish. If instead the Pivotal Point is broken in a downward movement, then an individual investor considers the case to be bearish for the stock or market.
A second way to utilize the Pivotal Points is as a price level for either entering or exiting a trade. Finding the right level to open a position or close out an existing one is critical. Investors can place buy limit orders based on the Pivotal Point resistance level breaking. They might also use the Pivotal Point support level as their stop loss to exit a trade should this critical support line fail.
Nowadays it is easy to figure up Pivotal Points. Computer programs and charting software can find the levels easily. When Jesse first created them, these points had to be manually figured out with no more than a calculator, pencils, and paper. There are a number of formulas that can be used to determine them. Jesse Livermore made his own charts by hand. He looked for the levels where the stocks tended to bounce several times to find them.
Many traders today consider Pivotal Points to be shorter term use indicators. Because a number of investors use them for a single day trading, they have to recalculate them every day. Despite this fact, even day trading Pivotal Points is considered to be helpful. This is because a person can quickly calculate up important levels where there will be significant price movement.