Central Pivot Range Explained
Investing in stock markets involves a fair bit of risks. As a result, different investors use different techniques to predict share movements and invest accordingly. One such technique is reading different charts and deciphering them to speculate market fluctuations and take profitable positions.
Pivot points are powerful indicators that help stock market investors to read and interpret charts. This is also known as the technical analysis of stocks. There are several pivot points used by traders to interpret price movements, but the most common one is the Central Pivot Range or CPR indicator.
In this article, you will learn what is a central pivot range indicator, how it is calculated, and how you can use it for the technical analysis of stocks. Let’s get started.
What is the Central Pivot Range?
As mentioned, the Central Pivot Range or CPR is an instrument for the technical analysis of stocks. Investors use the CPR indicator to determine key points of price levels and take trading positions accordingly. It is highly popular among stock market investors as it is quite simple and versatile. CPR indicator comprises three levels pointed on a chart. These are a central pivot point (also called the pivot), the TC or the top central pivot point, and the bottom central pivot point (abbreviated as BC).
Stock market investors largely use the CPR indicator to predict price levels of stocks during intraday trading. However, you need to understand two things if you want to use the central pivot range trading strategy. These include candlestick patterns and trading charts and also the resistance and support levels of stocks. These things help you determine the essential breakout points at different price levels of stocks during intraday trading.
Also Read: Range Bound Market
How to Calculate CPR?
The central pivot range trading strategy involves the calculation of three different price levels on the basis of a central pivot range formula. To calculate price levels using this formula, you need to know the highest, lowest, and closing price of the stock on the previous day. The idea behind the use of the levels of the previous day is to determine the movement of the price of a stock on a given trading day based on its performance of the previous day.
Below is the central pivot range formula to calculate the three price levels of a stock on a given trading day:
Central Pivot Point (Pivot) = (Previous day’s High + Previous day’s Low + Previous day’s closing price) / 3
Bottom Central Pivot Point (BC) = (Previous day’s High + Previous day’s Low) / 2
Top Central Pivot Point (TC) = (Pivot – BC) + Pivot
As you can see in the CPR formula mentioned above, you can determine all three levels of a stock’s price based on three variables, i.e., the previous day’s high, the previous day’s low, and the previous day’s closing point. When you use the CPR indicator in a chart, you will notice that the TC will represent the highest price level, BC will represent the lowest level, and the pivot will represent the centre.
How to Read and Interpret CPR Indicators?
You can use the CPR indicator to identify whether a stock is following a bullish or bearish trend. You can also speculate the day’s high and day’s low levels based on the previous day’s movement of that stock. Reading and interpreting the CPR indicator is easy:
- If the CPR indicator lines are forming an upward trend, it indicates a bullish market
- Conversely, if the CPR indicator lines are forming a downward trend, it points towards a bearish market
Below are the different interpretations based on the CPR indicator:
- Virgin CPR
When the price of a stock is not able to touch the CPR lines within a specific time frame, it is said to be the virgin CPR. It is observed that when a stock is not able to touch its previous day’s range, there is a 40% possibility that the stock would not touch the CPR levels for the whole day. Virgin CPR indicator can indicate a powerful resistance or support level.
- CPR Breakout
In case a stock breaks the TC or BC lines, it is referred to as the CPR breakouts. It indicates that there is a high possibility that the prevailing trend will continue for some time. A price above the TC reflects a buying trend, whereas a price below the BC reflects a selling trend. The CPR indicator will behave as a support or resistance in both cases, respectively.
- CPR Width
The width of the CPR lines can help you speculate the short-term price movements of stocks. If the CPR width is narrow, it indicates that the market is either bullish or bearish, and the current trend may continue. On the other hand, wide CPR width indicates that the market is moving sideways, and it’s better to avoid taking any trading positions.
You can use the central pivot range indicator to identify whether the market is showing a bullish or a bearish trend or if it’s moving sideways. When a stock is trading above the TC line, it indicates that the market is bullish, and you can take buy positions. Similarly, if a stock is trading below the BC line, you can exit long positions and take short positions. However, it’s crucial to maintain strict stop losses at every point.
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Frequently Asked Questions
When the price of a stock breaks the top central pivot point (TC) or the bottom central pivot point (BC), it is known as the CPR breakout. A CPR breakout indicates a strong bullish or bearish trend in the market. A price above the TC indicates a bullish trend, whereas a price below the BC indicates a bearish trend.
The distance present between the BC and TC lines is known as the CPR width. CPR width can be narrow, wide, or medium. A narrow CPR width indicates a bearish or bullish market, whereas a wide width of the CPR indicates sideways markets.
CPR indicator can be very accurate during intraday trading. We recommend you to use it in 5-minute charting for beta stocks or indices. CPR indicator with Volume indicator can ensure a high success rate of as much as 70%. However, you should always use stop losses while taking trading positions.