In trading and especially in the technical part, such factors are instrumental in enabling one to make right forecasts. This trend of analyzing trade data apart from the commonly known trading indices can be useful no matter what level of trading the ‘player’ is at.
Thus, this blog will describe the CPR concept in details giving this information on its calculation and application in such trading field.
What is called as CPR in Trading?
CPR refers to Central Pivot Range that is a set of 3 significant price levels derived from the preceding day trading range. These levels are used to determine the possible support and resistance zone in the current day’s trading. CPR assists traders determine whether the market is bullish, bearish or neutral and this in a way influences their decisions.
CPR is more applicable in the determination of short term price trends and the likely points of reversal, making it most effective within the day period. Therefore when dealing with the price level within CPR, the trader is able to make the right trades at the right time more accurately.
How is CPR Calculated?
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There are 3 ways to calculate the CPR, one is the Pivot point, the top central point and the bottom central pivot. Let’s have a look at their formulas and ways to calculate the pivot points.
Pivot Point (P):
P = (High + Low +Close)/ 3 P = 3High + Low + Close
The Pivot Point is the middle point in the range, and it becomes a basis of quotations in relation to the day’s trading.
Top Central Pivot (TC):
TC=(Pivot Point+High) ÷2 TC=2 × Pivot Point + High
This level acts as a resistance level or mark the end of the range and is also referred to as the limit level.
Bottom Central Pivot (BC):
BC= (Pivot Point + Low) / 2 BC = 2 Pivot Point + Low
This level acts as the lower support level to form this level as remaining at its lowest level.
All these three levels put together make up the CPR that traders apply in determining key price points.
Ambiguity of Students in writing CPR Levels
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CPR can tell a price story, including tendency in direction and, the possibility of breakouts, as well as where the market may encounter subtle buy or sell force. Let’s break down how to interpret the CPR levels:
- Narrow CPR: A narrow CPR means that the trend day is possible, or there is a breakout. It has also turned out that when the three levels of CPR – P, TC and BC – are closer to one another, it may mean that the price action is preparing for a large movement in either direction. This is the conditions most traders usually wait for to trade with breakout.
- Wide CPR: A wide CPR indicates a sideways or ranging type of market in which the price has the tendency to fluctuate between its supports and resistances. In such situations though, traders in particular use range bound techniques whereby they buy at lower levels and sell at the upper end of those levels.
- Price Opening Above CPR: If price opens above the CPR then the indication is that of an upward trend known as bullish sentiment which may mean that traders may be anticipating for a higher price. In this case CPR becomes a support zone.
- Price Opening Below CPR: If the price opens below the CPR there is bearish signal. Sellers might search for potential entries thanks to the fact that the CPR is going to be a resistance point most of the time.
- Price Trading Around CPR: When the price is near the CPR it details the fact that the market is in a state of flux. In such an occurrence, the trader should wait for the CPR to be violated clearly above or below for the next course of action to be taken.
Application of the CPR in Trading Strategies
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1. Breakout Strategy
Of all the trading strategies which we have discussed today, the most commonly used one is breakout trading where CPR is often used. For trend reversals traders wait for the price to go above the Top Central Pivot (TC) or below the Bottom Central Pivot (BC) replacing the previous trend. In a breakout scenario they set their stop loss orders usually below the BC for longs and above the TC for shorts.
Bullish Breakout: If the price rises above the TC with good momentum, oil traders can take a long position in anticipation of the prices to rise further.
Bearish Breakout: However, if the price goes below the BC with good volume, traders should look forward to shorting it in the future.
2. Reversal Strategy
CPR is also used for the purpose of finding out how these markets may be reversed in the future. The other kind of pivot is the Top Central Pivot (TC) or the Bottom Central Pivot (BC) and if the price gets to them and bounces then the trader can take advantage of this kind of move as it usually forms bearish or bullish candlesticks.
For example:
Bullish Reversal: In case the price rises to the BC, then leans back in creating a bullish candlestick pattern, then this could be viewed as a buy signal.
Bearish Reversal: When the price touches the TC line and fails to penetrate it and instead creates a bearish pattern then one might consider selling.
3. Intraday Trading
CPR is a rather effective tool in intraday trading helping determine critical price levels within a trading session. Indeed, if a trader is able to track the movements of the CPR price he or she can easily identify the direction of the market and make the appropriate trades during this period.
Moreover, when using the CPR it can be used in conjunction with other technical tools such as moving averages, Bollinger Bands or RSI to provide signals for entry/exit.
Conclusion
CPR is perhaps one of the most useful tools for trading that can help a trader to get insight into the market and determine the levels of the price which might be crucial for a definite breakout. No matter whether you are trading with the direction of the trend or on the contrary, using the Central Pivot Range can deliver very helpful information to you and help with your trading decisions. It is therefore important to adopt the use of CPR in your trading plan so as to improve your chances of being right about the direction to take, how to minimize risk and make better trades.
