Let's break down the CPR (Central Pivot Range) trading strategy and the Rule of Numbers in detail so that you can fully understand how they work and how they can be applied in trading.

1. CPR (Central Pivot Range) Trading Strategy
CPR (Central Pivot Range) is a price action-based indicator that helps traders identify key levels in the market. These levels act as potential support and resistance zones. The CPR is formed from three lines:
1. Pivot Point (PP)
2. Top Central Pivot (TC)
3. Bottom Central Pivot (BC)
These levels are calculated based on the previous day's high, low, and close prices. Here's how to calculate them:
- Pivot Point (PP):
\[
PP = \frac{{High + Low + Close}}{3}
\]
- Top Central Pivot (TC):
\[
TC = \frac{{PP + High}}{2}
\]
- Bottom Central Pivot (BC):
\[
BC = \frac{{PP + Low}}{2}
\]
The distance between the TC and BC forms the CPR.
How CPR is Interpreted:
- Narrow CPR: Indicates potential volatility. When the CPR range is narrow, expect big price movements (breakouts) in either direction.
- Wide CPR: Suggests a more stable or range-bound market. Wide CPR means the market may not see significant directional movement.
Key CPR Trading Rules:
1. Breakout Strategy (Narrow CPR):
- Bullish Breakout: If the price opens above or breaks above the top central pivot (TC), it indicates bullish momentum. You can go long after the breakout with a stop-loss below the bottom central pivot (BC).
- Bearish Breakout: If the price opens below or breaks below the bottom central pivot (BC), it indicates bearish momentum. You can go **short** after the breakout with a stop-loss above the top central pivot (TC).
Example:
- For XAU/USD (Gold):
- The previous day’s high: $1,920
- The previous day’s low: $1,880
- The previous day’s close: $1,900
- PP = $(1,920 + 1,880 + 1,900)/3 = 1,900
- TC = $(1,900 + 1,920)/2 = 1,910
- BC = $(1,900 + 1,880)/2 = 1,890
- If price breaks above $1,910 (TC), you could go long with a target at $1,920, with a stop-loss at $1,890 (BC).
2. Reversal Strategy (Wide CPR):
- When the CPR is wide, expect price to range between the top pivot and bottom pivot. You can trade reversals at these levels. If the price approaches the top central pivot (TC), it might act as resistance, while the bottom central pivot (BC) might act as support.
- If the price fails to break above TC, go short. If it fails to break below BC, go long.
3. CPR as Support and Resistance:
- If the price remains above the CPR, it’s a bullish sign.
- If the price remains below the CPR, it’s a bearish sign.
- The PP (Pivot Point) acts as a key level of support or resistance, especially during sideways markets.
2. Rule of Numbers in Trading
The Rule of Numbers refers to the tendency of price levels to gravitate toward round numbers or key psychological levels. Round numbers act as psychological barriers because traders often place buy and sell orders around these levels (e.g., $1,800, $1,850, $1,900).
How the Rule of Numbers Works:
1. Round Numbers as Support or Resistance:
- Support: If the price is falling, it may find support around a key round number (e.g., $1,800 in XAU/USD). Traders expect others to step in to buy at these levels, creating a barrier to further declines.
- Resistance: If the price is rising, a round number (e.g., $1,900) may act as resistance, as traders tend to place sell orders around these levels.
2. Price Gravitates Toward Round Numbers:
- When price is near a round number, it often moves toward it. For instance, if XAU/USD is trading around $1,880, it’s likely to test the psychological level of $1,900 because traders’ expectations cluster around round numbers.
3. Breakout of Round Numbers:
- When a round number is broken (e.g., price breaks through $1,900), it often leads to increased momentum as stop-losses get triggered, and traders enter on the breakout.
- Breakout traders look for significant movement after such levels are breached.
Trading Strategies Based on the Rule of Numbers:
1. Trading the Bounce:
- Place buy orders slightly above key support numbers (e.g., $1,800) and sell orders slightly below key resistance numbers (e.g., $1,900).
- This strategy works well when markets are ranging, and you expect price to respect these levels.
2. Breakout Strategy:
- Look for breakouts at key round numbers. For example, if XAU/USD breaks above $1,900, enter a long position aiming for the next round number ($1,920 or $1,950), with a stop-loss just below $1,900.
3. Psychological Levels in Trending Markets:
- In a strong trend, look for round numbers to act as temporary targets or barriers. For example, if XAU/USD is in an uptrend, the price may stall or consolidate near $1,950 before resuming its trend.
4. Scaling In or Out:
- Use round numbers to scale into or out of positions. For instance, if you’re buying XAU/USD during an uptrend, you might take partial profits at $1,950 and let the rest ride toward $2,000.
How CPR and the Rule of Numbers Work Together
You can combine the CPR strategy with the Rule of Numbers to improve the accuracy of your trades:
- When a round number coincides with the CPR levels, it strengthens that level's significance as support or resistance.
- For example, if the Pivot Point (PP) is at $1,900 (a key psychological level), this makes it a highly important level. A break above or below it could lead to significant moves.
- Entry Example: If XAU/USD is near $1,900 (PP) and breaks above both the round number and the top central pivot (TC), you could enter a long position targeting the next round number ($1,920), with a stop-loss below $1,900.
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Key Tips for Trading CPR and Round Numbers:
1. Wait for Confirmation: When trading CPR or round numbers, always wait for confirmation through a candle close or a strong breakout before entering a trade.
2. Use Stop-Losses: Always set stop-losses below/above support or resistance levels to manage risk.
3. Combine with Other Indicators: CPR works well when combined with other technical indicators such as moving averages, RSI, or MACD to confirm trade setups.
This overview by FxTrade Pips should give you a comprehensive understanding of how to trade using the CPR strategy and the Rule of Numbers.
Our website: www.fxtradepips.com