The Hindu Business Line : Trader's Corner

We take the discussion on pivot point forward this week. Some traders believe that pivot-point trading is more suitable for forex or commodity markets and that equity markets are inappropriate as price manipulations are rampant here. The way to circumvent this problem would be to apply this trading technique on only the large-cap stocks, which are also volume toppers.

Let us take long trades initiated using pivot points first. If the price opens above the pivot point and starts moving upward, then a long position can be initiated with a stop just below the pivot point and with the R1 as the target. If the price crosses above R1, that can also be an entry level with a stop just below R1 and R2 as the target. Generally, no buy is initiated near R2, as it is the upper limit of the trading range for the day. In case the price reverses from R1 or R2, it can be the right place to short the stock with a stop just above R1 or R2, with the target being the support just below.

In a similar way, if the price opens below the pivot point, it is a bearish signal and a short position can be initiated with a stop just above the pivot point and the target being S1. Price moving below S1 and moving towards S2 would also be a selling level. Selling is generally not done near the S2 as it is the lower boundary of the day's trading range. Price reversing from S1 or S2 can be used for initiating buy calls with the target being the level just above. Traders who peruse charts can use pivot points in association with other technical tools to decide whether to play long or short.

Let us illustrate pivot-point trading with an example. The high, low and closing price for Reliance on September 26, 2006 were Rs 1,179.9, Rs 1,163 and Rs 1,178.3 respectively. The pivot points using the formula would be as follows:

P = (1179.95 + 1163 + 1178.3)/3 = Rs 1,173.7

R1 = (1173.75 X 2) - 1163 = Rs 1,184.4

R2 = 1173.75 + (1179.95 - 1163) = Rs 1,190.7

R3 = 1179.9 + 2 X (1173.7 - 1163) = Rs 1,201.3

S1 = (1173.75 X 2) - 1179.95 = Rs 1,167.5

S2 = 1173.75 - (1179.95 - 1163) = Rs 1,156.8

S3 = 1163 - 2 X (1179.9 - 1173.7) = Rs 1,150.6

As with other methods of trading, comfort will be achieved only through constant practice.

Lokeshwarri S.K.

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