I know many of you are becoming more interested in a trading a system, especially after what the markets have been doing over the past 1.5 years.
Henry Carstens over at Vertical Solutions is a phenomenal resource for systems traders. He recently published this simple pivot-based trading system. I like it because it demonstrates how traders can take a system that they trade discretionarily, use language to quantify the setup and exit, and voila! Describing the setup in terms that can be quantified is crucial, and any traders looking to build a system should spend some time describing their set ups in this way.
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A pivot based trading system defines a focus of trading action, the ‘pivot point’ and places support and resistance lines around that point where trades can are to be entered and, perhaps, exited.
Calculation of the pivot point can be quite intricate but using yesterday’s close is a simple place to start.
For support and resistance there are again a dizzingy array of choices, but the volatility over the last 10 days is another easy place to begin. So…
- Support is: pivot – volatility(10), and
- Resistance is: pivot + volatility(10)
The entry rule for pivot systems is simple:
- Buy at support, and
- Sell at resistance
The exit rule was a bit tougher, but this seems reasonable and works:
- Exit longs at the highest close of the last 3 days, and
- Exit shorts at the lowest close of the last 3 days
Results for the sp e-mini contract, daily bars, 01/01/98 – 02/24/09:
- 200/285, 70%, avg 7.0 pts, sd 26.0 pts, t 4.4
The system is profitable in all years since 1998, it trades both long and short (important for adaptability to market changes), and is statistically valid (t score).
All it lacks are stops. Which are a problem…but may only mean that pivot points are better indicator foundations than trading system foundations. Note also how well the simple choice worked at each decision point in designing the system.
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Please click over to Vertical Solutions to see the equity curve for this system.
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