Date:08/10/2006 URL: http://www.thehindubusinessline.com/bline/iw/2006/10/08/stories/2006100800420800.htm

Back Trader's Corner

Lokeshwarri S.K.

We remain pivoted around the pivot-point trading this week, too. Some traders believe that pivot-point trading is inappropriate for equity markets, 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.

As explained last week, it is possible to calculate more than two supports and resistances around the pivot. We give below a formula that calculates three resistances and three supports:

R3 = H+2 X (P - L)

R2 = P+ (H - L) = P + (R1 - S1)

R1 = (PX2) - L

P = (H+L+C)/3

S1 = (PX2) - H

S2 = P - (H - L) = P - (R1 - S1)

S3 = L - 2 X (H - P)

P = Pivot point, R1 = resistance 1, R2 = resistance 2, R3 = resistance 3, S1 = support 1, S2 = support 2, S3 = support 3, H = high, L = low.

Let us illustrate pivot-point trading with an example. The high, low and closing price for Reliance on September 26 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

The rules explained in last week's edition can now be applied to trade with these pivot points. As with other methods of trading, comfort will be achieved only through constant practice.

It is useful to wait for the price to move above R1 before initiating a buy with the target at R2 or R3. Similarly, short trades can be initiated as the price moves below S1 with S2 or S3 as targets.