Last Updated on June 19, 2022 by Quantified Trading
We have been investing and trading for about 21 years, but not until now have we ever looked at a pivot points trading strategy. We can read a lot about pivot points in certain media magazines and by stock commentators but have seen very little backtesting of any pivot point strategies. Below you find six backtested strategies:
This article presents several pivot points trading strategies, and we find no strategy that is close to being tradeable in the S&P 500, Nasdaq, Russell 2000, or the USD CFH forex market. We conclude that the pivot points are merely hyped and serve not much purpose except for creating more noise in the market. That said, a couple of day trading ideas can perhaps be worked upon.
We are reading Briefing In Play before the US open, and they have a dedicated website to pivot points. Admittedly, despite seeing pivot points being referred to every day before the markets open, we have basically no clue what pivot points really are.
But they must have some predictive value, right? Some weeks ago we reread The Day Trader – From The Pit To The PC by Lewis Borsellino and he wrote how he used pivot points before trading every day (by the way, this is a horrible book) without going into detail about what he really did. Borsellino was among the best and biggest pit traders in the S&P 500 in the 80s and 90s, and the markets have changed a lot since then.
When Borsellino made so much money, pivot points must be a very good indicator?
Let’s start by explaining what pivot points are:
What are pivot points?
The main pivot point is the average price of the high, low, and close from the previous trading day. Presumably, any trading above this point is bullish, and bearish if below.
From this pivot point, we can derive many others pivot points both above and below that main point. These can be support and resistance lines.
To backtest pivot points we need to define some simple rules. We did the following:
- C is yesterday’s closing price
- H is yesterday’s high, and
- L is yesterday’s low
From these three variables we made the following five pivot points:
- Central pivot point P = (H + L + C) / 3
- First resistance R1 = (2*P) – L
- First support S1 = (2*P) – H
- Second resistance R2 = P + (R1 – S1)
- Second support S2 = P – (R1 – S1)
However, after searching the web there seem to be several ways to calculate pivot points. But we stick to our definition above.
In Amibroker, the pivot points defined above look like this on the NQ (Nasdaq) futures:
Now that we have defined pivot points, let’s start backtesting some simple pivot points trading strategies:
Pivot points trading strategies
There are probably a zillion ways to play pivot points. Unfortunately, Lewis Borsellino did not explain what he really did, he just wrote pivot points were very useful for him.
We assembled a few ideas of potential pivot points strategies. They are all based on the support and resistance (the main pivot point is PP):
- The market opens above yesterday’s close and drops to the first PP support. Entry is the first support PP and exit is at the close. Of course, this is a long-only strategy.
- The market opens below yesterday’s close, but above the first PP support, and drops to the first PP support. Entry is first support PP and exit is on the close.
- The market opens below yesterday’s close and rises to the first PP resistance. Entry is first resistance PP and exit is on the close. Of course, this is a short strategy.
- The market opens above yesterday’s close, but below the first PP resistance, and rises to the first PP resistance. Entry is first resistance PP and exit is on the close.
- The market opens below first support. First PP support now becomes resistance and first PP support is now an entry for short. The exit is as usual on close.
- The market opens above the first PP resistance. First PP resistance now becomes support and first PP resistance is now long entry. Exit on close.
As you can see, these are just day trades. As mentioned, the are infinite ways to trade this and we only looked at the first support and resistance, but perhaps this has given you some ideas for further research.
We tested from 2010 until today on the following 1-minute futures data: ES (S&P 500), NQ (Nasdaq), RTY (Russell 2000), and USD/CHF.
Pivot point trading strategy 1:
The first strategy shows the best result in NQ. This is the equity curve:
There are 172 trades at the average gain is a respectable 0.16% per trade, but rather erratic. The win rate is 62%.
Pivot point trading strategy 2:
The second strategy performs much worse. The best results were in RTY:
Pivot point trading strategy 3:
The short strategy performs pretty bad, perhaps as expected. This is how RTY performed:
Pivot point trading system 4:
The equity chart below of RTY shows that this strategy perhaps can be flipped: Go long instead of going short. However, the average gain per trade is a bit too low at 0.1%. But it shows RTY has potential for some intraday trend-following / momentum strategies:
Pivot point trading system 5:
This short strategy doesn’t work at all. The least losses had NQ:
Pivot point trading strategy 6:
The last trading strategy of the day shows the following equity curve for RTY:
The average gain is a negative 0.1%. Perhaps this is a trading idea that can be improved if flipped, ie. go short?
Pivot points trading strategies – conclusions:
The article tested 6 different (and perhaps naive) pivot points strategies. As you can see, none of them work on their own, but we believe a couple of ideas can be used for some further research for day trading strategies.