The Difference Between ADR & Pivot Points?

Even though they're calculated differently, both are useful tools to get a more in-depth view of expected volatility.
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We just have a quick question here from Shariah, asking whether there is a correlation between the ADR and pivot points. As always thanks for the question Shariah. So looking at the ADR and the pivot points, both of them at their most basic level actually shows us the same thing. So, just at different intervals.

So in that sense they do have a correlation with each other. Both of them are basically designed to show us average volatility based on a slightly different calculation in terms of the Math, but shoWing us the average volatility for a particular asset over a specified time horizon. So the biggest difference between them for me is just the difference in volatility as it’s measured by the different time horizons.

So for example, the pivot points I’m using, let me just quickly open this one up, is just the classic pivot point that’s calculated on the daily.

So that means it shows us the average volatility for this particular instrument based on the last day’s price action and gives us an average of the open, the high and the low of the prior day and that normally gives us the central pivot point or the daily pivot point. And also then based on a different calculation, it also gives us possible support and resistance levels marked out as S1, S2 or R1, R2, et cetera. Also based on the prior day’s movement.

Now, if we compare that to something like the ADR, let’s just open up the ADR. So if we compare that something like the ADR that is usually set at a higher interval, so you can do anything from two weeks, which is normally two trading weeks will be 10 trading days so you can set your perimeter at 10 or sometimes also set it at 21, which gives us a roughly, a rough estimate of the month’s trading days.

So normally 21 trading days roughly would be a month’s worth of volatility. So you can either set that at two weeks or three weeks or four weeks. You know, 10 or 15 or 21 trading days and that basically gives you the same, it shows you the same thing in that sense, but it is calculated slightly differently and obviously used as you said, at a, with a slightly higher time frame. So think of the one being a lot more sensitive to the immediate term and the other giving you a bigger picture view of the average volatility over a slightly larger period.

So as an example, you know, if we change the ADR’s value to let’s say, just a look back of one, we should see it coming in very close to the R1 and the S1 pivot.

Now based on, of course the way they calculated they will be slightly different in terms of price action. So it’s not always gonna come in exactly on the S1 and the R2 or the S1 and the R1. Let’s just do another example because it will be calculated slightly differently, but it should be fairly close.

So here we can see, you know that S1 coming in right on top of the ADR low but we do have a little bit of a gap there, between the R1 as well as the high. So it is, there is a slight difference still, but by reducing that ADR level, you know, down to one it should give you, you know just a little bit of an idea of that they actually do show you the same thing but just on a different time scale. Now the only downside with something like the pivot points is that it is calculated based on the prior day’s movement.

So if you have a previous day that was very, very quiet, a very quiet session you will have a very tight range the next day, right? Which means that if you have a very big market moving event today, for example, you will easily slice through the first support and the resistance point, and might even reach the second or the third pivot levels for that particular day in a very extreme environment. And the vice versa is also true.

If the prior day was a very big mover you’ll have a wide range for the pivots the next day, which means that you might not even reach a pivot, you know, in terms of the S1 or the S2, the S1 or the R1 for that particular session. So that’s why combining the two of them is very useful for me because it gives me a slightly different way of looking at the expected volatility for that particular asset.

So you know if I had that big volatile move yesterday, you know, I might see the pivot points reach far outside the ADR high and low, but then of course I can use the ADR high and low as a better gauge for that particular session in terms of possible levels.

The other thing I like about both of them is that there’s no subjectivity with them, you know, I don’t do the calculations myself. It’s done for me which means I can basically just focus on adding my other tools on top of that like normal support and resistance and psychological price levels, et cetera to find those very high probability area.

So, I hope that helps Shariah. As always if there’s any other questions please don’t hesitate to let us know.

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