Technical analysis is part of every stock trader’s ammunition. Apart from fundamental analysis of the company’s stock, the price and volume movements of the stock are affected by various factors like the demand-supply of the shares or the current market sentiment, etc. Such technical analysis of the stocks can be done using various tools and techniques.
One of many such techniques is the ability to read different types of charts and interpret them to take a profitable position based on the market fluctuations. Central Pivot Range is a common tool used by traders for analyzing stocks.
Given below is the meaning of Central Pivot Range and related details of the same.
What is Central Pivot Range (CPR)?
Central Pivot Range as mentioned above is a tool for technical analysis. Traders use it in intraday trading as an efficient trading indicator. Central Pivot Range (CPR) indicator is used to identify key points of price levels and trade accordingly. Traders can take up trading positions based on the different levels on the chart. It is quite popular among traders as it is quite versatile and simple to understand. CPR indicator has three levels that are pointed on the chart. These levels are pivot points, top central pivot point, and bottom central pivot point.
There are two basic concepts that need to be understood to understand the CPR indicator. These are trading charts and candlestick patterns as well as support and resistance. The former is used to identify the critical breakout points at price levels. Support and resistance help the trader identify the lowest and the highest price levels that can be reached for any stock. It safeguards the trader against potential losses and limits them.
How to calculate CPR?
CPR indicator involves the charting of three price levels based on fixed formulae. For this, the trader has to use the previous trading day’s highest, lowest as well as closing level of the stock. The basis of using the previous day’s required levels for the next schedule is to understand and predict the price movement of the stock based on the previous day’s performance.
The three levels of CPR indicator and the formula to calculate them are mentioned hereunder.
- Pivot point = (High + Low + Close) / 3
- Top Central Pivot Point (BC) = (Pivot – BC) + Pivot
- Bottom Central Pivot Point (TC) = (High + Low) / 2
How to interpret CPR?
CPR indicators can be used to identify the bullish or the bearish trend in the market or for the stock. The analysis or the interpretation based on the CPR indicator is quite simple.
- In case the CPR lines form an increasing trend or a higher trend, it suggests a strong bullish approach.
- On the other hand, if the CPR lines form a downward trend, it indicates a bearish approach.
There are many interpretations of the CPR indicator based on its levels.
1. Virgin CPR
A virgin CPR is when the price of the stock does not touch the CPR lines. It is usually observed that if the price of a stock fails to touch the range the previous day, then there is approximately a 40% chance that the price of the stock will fail to break the CPR range. It is important to note that a virgin CPR can be strong support or resistance based on the current market scenario.
2. Price trading at a level above TC
A higher current price than the Top Central Pivot Point (TC) indicates a buying trend where the traders are ready to buy the stock even when the average price is on the higher side. In such a case, the CPR will act as a support.
3. Price trading at a level below BC
When the current price is lower than the Bottom Central Pivot Point (BC), it indicates a seller’s market. It indicates a bearish market with many selling opportunities. Also, in such a case, CPR will act as a resistance.
4. Price trading within the CPR lines
When the current price is trading between the CPR lines, it indicates an accumulation phase and a sideways market. Traders can wait for a CPR breakout above TC with the volume in such a case. Another option is to buy at the bottom central pivot point (BC) keeping the target top central pivot point (TC) which can be done in case of wide CPR.
What are the benefits of CPR?
CPR indicator is an excellent technique that helps traders take profitable positions by combining different trading methods. Traders can use this technique on its own or in combination with other indicators.
- CPR indicator is a much-preferred price and trend indicator, unlike many other technical analysis techniques. This is on account of this indicator being quite simple to understand and follow.
- It is used widely by professional traders for intraday trading. CPR indicators have strong support and resistance levels that are used by the traders.
CPR indicators can be used to identify the bullish and bearish trends of the market and take suitable trading positions. When the stock is at a higher level than the TC it is a strong indicator of the bullish trend. On the other hand, if the stock price is continuously lower than the BC line, it is a strong indicator of the bearish trend. Another important factor to consider while trading is the use of stop loss. This is especially important for new traders as it limits their potential loss or allows them to exit the markets with minimum assured profits.
A CPR breakout is when the stock price is pushed beyond the TC level or The BC level of the CPR lines along with high volumes.
The CPR width is the distance between the TC and the BC lines of their CPR indicator. CPR indicator can be narrow, medium, or wide. A narrow CPR width is when the distance between the TC and BC is relatively small. It indicates a trending market. When the distance between TC and BC is quite huge, it is a wide CPR width and indicates a sideways market. A medium CPR width is when the distance between TC and BC is between the narrow and wide margins of CPR.
CPR is usually used in intraday trading and provides the highest accuracy. However, it can also be used to study the daily charts and weekly charts of stock and determine the prevailing stock patterns. The usual practice is to calculate CPR at a higher timeframe than the one used for trading. For example, if the trader is aiming for daily trading, CPR should be calculated with a weekly timeframe while if the trader is looking for weekly trading, the CPR has to be calculated with a monthly time frame.
The basis for calculating CPR is the previous day’s or previous session’s stock levels (highest, lowest and closing stock level).