We all know that Pivot points are one of the most basic and powerful indicators, we use in the Technical analysis. However, it is composed of a pivot line that is surrounded by a series of support and resistance levels. It helps in speculating the price movements. There are different parts of pivot points that are used by price action traders. Among them, one of the well-known indicators is Central Pivot Range or CPR Indicator. In this post, I will talk about the central pivot range indicator and its application in Zerodha.
The CPR Indicator FAQs
The Central Pivot Range or CPR is one of the most popular as well as versatile price-based indicators that is available to traders. At any particular time, the range can either be support or resistance. Moreover, it can logically forecast trending or sideways any security’s price behaviour. Also, dictate the particular day’s direction, or serve as an integral part of a trend.
CPR or central pivot range is one such trending indicator, that is quite popular among day traders. The pivots indicator to some extent is better. Unlike other technical indicators, CPRs are not lagging but leading indicators. Also, they are static and remain at the same prices throughout the particular day at all timeframes.
Basically, you can express CPR as a percentage. Central Pivot Point (P) = (High + Low + Close) / 3.
1) First Resistance (R1) = (2*P) – Low.
2) Second Resistance (R2) = P + (R1-S1)
3) First Support (S1) = (2*P) – High.
4) Second Support (S2) = P – (R1- S1)
What is Central Pivot Range (CPR)?
Basically, Central Pivot Range is a well-known technical indicator among traders. It is usually comprised of 3 levels. These are a central pivot point (pivot), top central level (TC), and bottom central level (BC).
Who Invented the Central Pivot Range Indicator?
The Central Pivot Range (CPR) indicator was invented by the legendary trader and author Frank Ochoa. He first developed the concept in 2001 and introduced it to the public through his books, newsletters and interviews. The CPR is a momentum tool that measures psychological sentiment behind any stock or asset’s price movements over given time frames. It looks at how far prices have risen above/below an average pivot point, where the distance from this central pivot provides insight into what emotions investors feel towards that asset before making trading decisions.
Calculation of the CPR Indicator
The calculation of the levels is very simple:
TC = (Pivot – BC) + Pivot
Pivot = (High + Low + Close)/3
BC = (High + Low)/2
Frank Ochoa
As you can see from the above CPR formula, all the 3 levels are calculated using just 3 variables, High, Low, and Close price. When you add CPR levels in a stock’s chart, TC is highest. The pivot is at the center and BC is the lowest level. However, depending on market conditions TC’s value may be lower than BC’s. Irrespective of the calculation, the highest of the 3 values is typically termed TC and the lowest is BC.
The fundamental idea behind this indicator is that the particular day’s trading range captures everything about the market sentiment, and hence this range can be used to predict the price movement of the following days.
We use the previous day’s high, low, and close prices to calculate the CPR levels for the current day. And these levels remain constant throughout the day.
How to Attach Central Pivot Range Indicator on Charts?
Let us attach the CPR indicator on the Zerodha platform. On Zerodha Kite search for ‘Pivot’ in studies, and you’ll find the CPR indicator –
This is a 15-minute chart of M&M here. Once you load the CPR indicator, it loads as three horizontal lines, as seen below.
One thing that stands out is the varying width of the CPR. Here, the three points have been marked.
How to Trade the Central Pivot Range?
Just look at the image above, the first arrow starting from left, ignore the CPR but look at the price action itself. Remember this is the 15-minute chart, and it is quite clear that the day started with a small green candle with not much movement throughout the day. The open and close were close to each other.
Whenever we have a sideways movement, the next day’s CPR narrow ranged, this is exactly what we observe the next day. Now the 2nd day itself was a trending day. Hence the CPR for 3rd day was a wide-ranged one.
CPR Width and Price Trend
So the point is –
- If today is a narrow-range day, tomorrow’s CPR will be a narrow-ranged CPR
- If today is a trending day, tomorrow’s CPR is a wide-ranged one. The weaker the trend, the wider the CPR.
Identifying the Trend with the CPR Indicator
Alright, so how do we use the CPR? Well, this is quite straightforward.
Bullish Outlook
Look for buying opportunities when the current market price is higher than the ‘Top central pivot’ or the (TC).
Let me elaborate. Assume a stock has rallied for a bit. The current market price is higher than the TC, and you are looking for an opportunity to set up a buy trade.
You can now wait till the stock arrests its rally and retraces back to the TC line.
I’ve highlighted a possible opportunity here –
From a price action perspective, when the LTP is higher than the TC, it indicates that the traders are willing to buy even though the average price is higher. Hence, you should look for buying opportunities. Remember, when CMP is higher than TC, the TC now acts as a support line.
Bearish Outlook
Likewise, when the stock or the index is trading lesser than the “Bottom Central Pivot’ (BC). When the current market price is less than that of BC, it implies that there is bearishness in the market, hence look for selling opportunities.
Again, look for a price pull back to the BC line before initiating a fresh short.
Range Trading with the CPR Indicator
You can even trade the stock while it is within the CPR. Trading, while the stock price is within the CPR, is like a range trade.
You buy when the stock is at BC, with TC as a target and sell (fresh short) when the stock is at TC with an expectation that the price declines to BC soon.
Of course, I do know many traders who prefer not to trade the range and prefer to trade only the pullbacks. I too would prefer to use CPR only to trade the pullbacks.
Time Frames of the Central Pivot Range
- When you plot the EOD CPR, the previous month’s OHLC is referenced
- Previous week’s OHLC is a reference when you plot CPR for 30mins and 1-hour candles
- The previous day’s OHLC is referenced when you plot CPR for 1, 3, 5, 10, and 15-minute candles
Conclusion
We found that the CPR indicator to be highly accurate in the intraday timeframe. We recommend you use it in a 5-minute chart for high-beta stocks or indices. If you trade based on CPR breakout with volume confirmation, the success rate can be as high as 70%. But don’t forget to put a stop-loss to save your capital from unexpected moves. As a general rule, you can use one of the CPR levels as a stop loss. For example, if you BUY as stock based on TC breakout, then the BC line can be your stop-loss. If the CPR width is very narrow you can even look at the previous day’s CPR levels as a stop loss.
Like everything else in technical analysis, CPR also is not a holy grail. You can only succeed with proper position sizing and risk management.