Trading Strategies Pivot Trading
Trading Strategies Pivot Trading – This strategy is simply based on the concepts of Pivots. Part of what makes the Pivots trading so exceptional is the fact that they are based purely on Price. It is this fact that gives pivot traders a huge advantage over other types of indicator-based traders. Its a no brainer that , price-based indicators reveal true market-generated information. Traders that use price in their day to day routine are using the latest information available. Traditional indicators are lagging indicators, which means as soon as they confirm a move, most price-based traders have already identified a reversal and are already profiting in their trades, leaving the indicator-based traders giving them their desired fill price. The truth is the best leading indicators are always price-based, like Pivots. I had presented this strategy in the forum last year. I thought of updating the strategy and the results here.
Trading Strategies Pivot Trading – Pivots Explained
Pivots always create confusion and partly that has to do with the number of variations that exists in Pivots. Right from traditional pivot points to Camrilla pivot points to Demark pivot points are used in varying manner. But the most effective still remains the Traditional Pivot points.
Once we plug in the high, low, and close of the prior day, the formula will automatically calculate the pivot, two resistance levels (R1 to R2), and two support levels (S1 to S2) that are to be used for the trading system. The high, low, and close are used for the equation because they are the most important values for any given time period, whether it be a single bar or an entire day or month. The high and low represent the most bullish and bearish of expectations for the market for that period of time, thus making these values important reference points. Likewise, where the market closes can give insight into the collective minds of the market heading into the following period of time.
The Formula for Standard Pivot Calculation is As follows,
R2 = Pivot + (High – Low)
R1 = 2 x Pivot – Low
Pivot = (High + Low + Close)/3
S1 = 2 x Pivot – High
S2 = Pivot – (High – Low)
Trading Strategies Pivot Trading – Strategy Explained
Traditional usage of Pivots has been to use it on intraday basis by observing the behavior of price between P, R1, R2, S1, S2 and R3,S3, R4, S4. However, I have modified this to use it on End of Day Basis. This way simple Pivot trading technique can be used for positional trading. Rules for trading this strategy is mentioned below,
Buy When the Current Close is greater than the previous Day’s Resistance (R1) level or (R2) level (for traders who want more confirmation)
Sell When the Current Close is less than the previous Day’s Support (S1) level or S2 level for traders who can manage little more drawdown.
Personally I have used R1 and S2 values. Its a two line system but works amazingly well on Nifty and Bank Nifty. Position sizing can be looked at in detail and returns can be maximized. I have shared the results of this system based on fixed value testing. I havent used position sizing as I leave on the trader to implement his own position sizing algorithm.
Trading Strategies Pivot Trading – Strategy Results
Equity Assumed – 30 L
Testing Period – 1994 – 16th August 2013
Instrument – CNX Nifty
Slippage & Commissions – 0.1% Trade Value
Trade – Long Only
Profit Factor – 2.0
Return Vs Max Drawdown – 4.49
K – Ratio – 0.1204
Strategy gives a very stable and rising equity curve despite market condition. Even in markets like 2008 and 2011, strategy worked very well. Drawdown of the strategy is very comfortable as well. Maximum strategy drawdown has been 9% at worst. In periods of 2008 and 2011, when bear markets was at its peak, drawdown was just 3-5%.
Detailed backtest report is available here.
Amibroker AFL for the same can be downloaded from here.