How to Build a Simple Pivot-based Trading System

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... The entry rule for pivot systems is simple: The exit rule was a bit tougher, but this seems reasonable and works: Results for the sp e-mini contract, daily bars, 01/01/98 - 02/24/09: 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.

Henry Carstens
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