6 Pivot Point Trading Strategies: Backtest, Definition, Formula, Analysis, and Performance
Pivot point trading strategies involve using key support and resistance levels calculated from previous market data to determine potential entry and exit points for trades.
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 don’t serve many purposes 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?
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.
What is the Pivot Points Formula?
To backtest pivot points we need to define some simple rules. Here is the Pivot points formula:
- C[1] is yesterday’s closing price
- H[1] is yesterday’s high, and
- L[1] is yesterday’s low
From this formula and three variables, we made the following five pivot points:
- Central pivot point P = (H[1] + L[1] + C[1]) / 3
- First resistance R1 = (2*P) – L[1]
- First support S1 = (2*P) – H[1]
- 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
Pivot point trading strategies involve using pivot points, which are significant price levels derived from previous trading periods, to identify potential support and resistance levels for making trading decisions. Traders typically use pivot points in conjunction with other technical indicators to determine entry and exit points for trades.
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):
Trading Rules Pivot Points
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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?
What are pivot points, and how are they calculated?
Pivot points are derived from the average of the high, low, and close from the previous trading day. The formula involves calculating various support and resistance levels to aid in trading decisions. Pivot points involve calculating the central pivot point and deriving support and resistance levels.
Are pivot points effective for trading the S&P 500, Nasdaq, Russell 2000, or the USD/CHF forex market?
The article investigates the viability of pivot points in trading various markets, including major indices like S&P 500, Nasdaq, Russell 2000, and the USD/CHF forex market. Through rigorous backtesting of several strategies, the conclusion drawn is that none of the tested pivot point strategies proved consistently tradeable in these markets. This finding prompts a critical examination of the widely discussed pivot points, raising questions about their effectiveness in modern trading environments.
How did Lewis Borsellino use Pivot points in his trading?
Lewis Borsellino, a prominent pit trader in the 80s and 90s, mentioned using pivot points daily without providing specific details. While acknowledging the historical use of pivot points by notable traders like Lewis Borsellino, whether pivot points have retained their predictive value in today’s fast-paced and technologically advanced trading landscape. Traders must consider alternative strategies or delve deeper into pivot point variations that might align better with current market conditions.
Related reading: USD/CHF Forex Trading Strategy Swiss Franc Currency Pair (Backtest)
How are pivot being calculated?
The pivot is calculated by determining the difference between the previous day’s high and low prices. The main technique that most traders use to calculate pivot points is the five-point system:
- C[1] is yesterday’s closing price
- H[1] is yesterday’s high, and
- L[1] is yesterday’s low
From this formula and three variables, we made the following five pivot points:
- Central pivot point P = (H[1] + L[1] + C[1]) / 3
- First resistance R1 = (2*P) – L[1]
- First support S1 = (2*P) – H[1]
- Second resistance R2 = P + (R1 – S1)
- Second support S2 = P – (R1 – S1)
What are the different types of pivot points used in trading?
There are several types of pivot points used in trading, including:
- Standard Pivot Points: Also known as Classical Pivot Points or Floor Pivots, these are the most commonly used pivot points. They are calculated using the previous day’s high, low, and close prices. These are the ones we have described in this article.
- Woodie’s Pivot Points: These pivot points use a formula that places additional weight on the market’s closing prices.
- Camarilla Pivot Points: These pivot points were introduced by Nicolas Scott in the 1980s. They use a total of nine levels to determine support and resistance levels.
- Fibonacci Pivot Points: These pivot points use Fibonacci studies (projections, extensions, and retracements) to determine trend direction and trading stance.
- Demark Pivot Points: These pivot points were designed by renowned trader Tom Demark and are conditional in nature with an outcome that is based on the relationship between price bars.
Each type of pivot point has its own unique formula and approach to identifying potential support and resistance levels in the market. Do they work? There is only one way to find out, and that is via backtesting.
What are the pros and cons of using pivot points?
The pros of using pivot points are that they are easy to use, they are objective and quantifiable, they are versatile, and they can help you confirm support and resistance. a breakdown of their pros and cons:
The cons of using pivot points are that they are lagging the price and they have a low win ratio (according to our backtests).
Who invented pivot points?
Pivot points were invented by floor traders while this was still the main type of trading. Itæs not as widely used today.
Pivot points trading strategy – 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.