In this article, we will discuss
- What is the Central Pivot Range (CPR)?
- Understanding the Central Pivot Range
- How to Interpret the Central Pivot Range (CPR)?
- Conclusion
Technical analysis tools are essential when trading in the financial markets. In addition to providing crucial insights into the market and the asset you are trading, they also enable you to make informed trading decisions.
One of the many technical indicators in use is the Central Pivot Range (CPR). With CPR, you can understand market trends better, identify trading opportunities and manage risks. This article delves into what the CPR indicator is, how you can calculate it, and the different ways to interpret the indicator’s results.
What is the Central Pivot Range (CPR)?
The Central Pivot Range is a technical indicator that can determine the key price points of an asset, such as the support and resistance levels for a given trading period. It is primarily used in intraday trading and is used to determine the ideal entry and exit points.
The CPR indicator essentially serves as a zone around which the price movements of an asset occur. By analysing the price action around the Central Pivot Range, you can easily identify whether the market is in an uptrend, a downtrend or range-bound. The insights you gain by analysing the indicator can be used when formulating trading strategies.
Understanding the Central Pivot Range
The Central Pivot Range indicator is made up of three primary lines: the Pivot Point (P), the Top Central Pivot Point (TC), and the Bottom Central Pivot Point (BC). Here is an in-depth look at each of these components.
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Pivot Point (P)
As the name implies, the pivot point is the central reference level around which the market sentiment of an asset is gauged. If the current market price of an asset is above the pivot point, it indicates bullish sentiment. On the other hand, if the market price is below the pivot point, it usually indicates bearish sentiment in the asset.
The pivot point is calculated by adding an asset’s high, low and closing prices during the previous trading period and then taking an average of the same. You can use the following mathematical formula to calculate the pivot point.
Pivot Point (P) = [(Highest Price + Lowest Price + Closing Price) ÷ 3]
Assume you wish to calculate the Pivot Point of a stock and the chosen trading period is 30 minutes. Now, the highest price that the stock touched in the previous 30-minute trading window is Rs. 380, the lowest point is Rs. 340 and the closing price is Rs. 370. In this case, the Pivot Point of the stock would be as follows:
Pivot Point (P) = Rs. 363.33 [(Rs. 380 + Rs. 340 + Rs. 370) ÷ 3]
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Top Central Pivot Point (TC)
The Top Central Pivot Point of the CPR indicator acts as a key resistance level. If an asset’s price rises above the TC, it indicates bullish sentiment. You can consider entering a long position to capitalise on the price movement.
To calculate the Top Central Pivot Point, all you need to do is add the Pivot Point and the highest price of the asset in the previous trading period and take an average of the two. Here is the mathematical formula you can use to calculate the TC of an asset.
Top Central Pivot Point (TC) = [(Pivot Point + Highest Price) ÷ 2]
Now, let us take the previous example. The highest price that the stock reached during the previous trading period was Rs. 380. The Pivot Point, as per our calculation, was Rs. 363.33. Substituting these two values in the above-mentioned formula should give us the TC of the stock.
Top Central Pivot Point (TC) = Rs. 371.66 [(Rs. 363.33 + Rs. 380) ÷ 2]
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Bottom Central Pivot Point (BC)
The Bottom Central Pivot Point of the CPR acts as a key support level for an asset. If an asset’s price drops below the BC, it indicates bearish sentiment. You can consider entering a short position at this point to capitalise on the ensuing price movement.
To calculate the Bottom Central Pivot Point, simply add the Pivot Point and the lowest price of the asset in the previous trading period and take an average of the two. Here is the mathematical formula you can use to calculate the BC of an asset.
Bottom Central Pivot Point (BC) = [(Pivot Point + Lowest Price) ÷ 2]
In the first example, the lowest price that the stock touched during the previous trading period was Rs. 340 and the Pivot Point for that same period was Rs. 363.33. Using these two values, we can easily determine the BC of the stock.
Bottom Central Pivot Point (BC) = Rs. 351.66 [(Rs. 363.33 + Rs. 340) ÷ 2]
How to Interpret the Central Pivot Range (CPR)?
As a trader, you must know how to interpret the CPR indicator to make effective trading decisions. Here is a guide that can help you understand the relationship between the various price actions and the technical indicator.
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Price Above the Top Central Pivot Point
If the current market price of an asset moves above the TC, it indicates bullish sentiment despite the asset’s price being higher than the average price. Since the price is expected to move higher, you can consider taking up a long position in the asset.
That said, before initiating any kind of position based on the CPR indicator, it is advisable to obtain confirmation from other indicators such as candlestick patterns, moving averages or the Relative Strength Index (RSI). This way, you can reduce the chances of the market moving against you unexpectedly.
Furthermore, when initiating a long position, remember to consider the TC as the support level. You can place a stop-loss order at or near the TC to prevent your position from making losses due to adverse market movements.
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Price Below the Bottom Central Pivot Point
On the contrary, if the current market price of an asset is below the BC, it suggests bearish sentiment and that traders are likely to sell the asset since it is lower than the average price. In this case, you can consider taking up a short position in the asset since the price is expected to fall further due to the increased selling pressure. When initiating a short position, treat the BC as a resistance level and place a stop-loss order at or near this point to protect yourself from adverse market movements.
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Price Within the CPR Lines
If the current market price of an asset is within the three CPR lines, it suggests a range-bound market. In such situations, the Bottom Central Pivot Point would be the support level and the Top Central Pivot Point would be the resistance level.
You can employ range-bound trading strategies such as buying the asset when its price is at or near the BC and then selling when the price is at or near the TC. Alternatively, you could also consider shorting the asset when it is at or near the TC and squaring off your position when the price is at or near the BC.
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Narrow CPR Lines
If the asset moves sideways or if there have not been any major price movements during the previous trading period, the three CPR lines will be close to each other. Narrow CPR lines indicate low volatility.
If the Central Pivot Range indicator is consistently narrow, it could potentially indicate a breakout move in the future. You can use single candlestick patterns and other technical indicators to determine the direction of the potential breakout.
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Wide CPR Lines
If the asset trends strongly in any particular direction during the previous trading period, the three CPR lines will be far apart from each other. Wide CPR lines indicate high volatility. In such situations, it is advisable to use strict risk management measures like stop-loss and position sizing. This way, you can mitigate the risk of your trades losing value due to unexpected market movements.
Conclusion
The Central Pivot Range indicator is a very important tool to have in your trading arsenal. By providing clear support and resistance levels for an asset, the indicator enables you to assess market sentiment more accurately.
Furthermore, the CPR is versatile enough to be used in various time frames, making it suitable for different trading approaches, including intraday and swing trading. However, it is important to remember that relying entirely on the indicator alone to make trading decisions is inadvisable. Instead, you must also use other technical indicators that complement it to ensure that your decisions are effective and in line with the current market conditions.
If you plan to participate in the Indian financial markets, you must have an active demat account. Without it, you cannot purchase or sell financial securities such as stocks, bonds or derivative contracts like futures and options on an exchange.
Samco Securities offers one of the most feature-rich trading and demat accounts in India. By opening a demat account with Samco, you get to enjoy a host of benefits, such as zero account opening charges and zero Account Maintenance Charges (AMC) for the first year. Furthermore, you also get access to an extensive range of tools and features designed to make your trading experience seamless and successful.
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