Backtesting Pivot Points trading strategy 2018 – 2020 AUDUSD, EURUSD
By Queenie Wu 23 Aug 2020
Pivot Points trading strategy are used by traders in the financial markets. It is simple to calculate based on the high, low and closing prices of previous trading day. They are used to predict support and resistance levels in the current trading session. We can use these support and resistance levels to determine entry and exit points. Three kinds of orders can be place:
1. Market order for immediate action based on our expected market direction.
2. Limit order: we would like to open our position at a better price at previous support / resistance level). This can be a kind of swing strategy.
3. Stop order: we expect the price will pass those critical S / R levels and attain the level beyond. This can be a breakout strategy.
Before we execute our trade, we have to decide our expected direction of trade of that day. How to do it? We are going to test 2 hypotheses.
How to calculate the Pivot levels?
Pivot point = (H + L + C) / 3
R1 = (P x 2) – L
R2 = P + (H – L)
R3 = 2 x P + (H – 2 x L)
S1 = (P x 2) – H
S2 = P – (H – L)
S3 = 2 x P + (L – 2 x H)
Hypothesis 1:
When the price of an asset is trading above the pivot point, it indicates the day is bullish. The price is likely to go up to a higher level. We predict that we will have an uptrend day.
When the price of an asset is trading below the pivot point, it indicates the day is bearish. The price is likely to go down to a lower level. We predict that we will have a downtrend day.
I have checked 2 cases with trade stared at 0:00 vs at 8:00 (13:00 HK Time). Two currency pair is checked. EURUSD, AUDUSD
Assume:
If current day’s actual closing price > opening price, it is an uptrend day.
If current day’s actual closing price < opening price, it is a downtrend day.
No of trading days from 2018 – 2020 Aug: 684
Trading time:
Case 1a)
Everyday, at 0:00, let’s start our trade based on the PP point vs price at that time to decide our expected market direction of that day. Comparing the actual trend and expected trend, what is the winning rate?
|
|
EURUSD: |
AUDUSD |
|
No of correct prediction: |
349 out of 684 |
359 out of 684 |
|
Winning rate: |
51.02% |
52.49% |
Based on Price vs PP to form expected trend direction, there are
|
|
EURUSD: |
|
Expected uptrend |
324 |
|
Expected downtrend |
360 |
How many expected uptrend cases will actually go beyond R1 or R2?
|
|
EURUSD |
|
Go beyond R1 (win rate) |
93 (93 / 324 = 29%) |
|
Go beyond R2 (win rate) |
41 (41 / 324 = 13%) |
How many expected downtrend cases will actually go beyond S1 or S2?
|
|
EURUSD |
|
Go beyond S1 (win rate) |
92 (92 / 360 = 26%) |
|
Go beyond S2 (win rate) |
45 (45 / 360 = 13%) |
Case 1b)
Everyday, at 8:00 (13:00 HK Time), let’s start our trade based on the PP point vs price at that time to decide our expected market direction of that day.
|
|
EURUSD: |
AUDUSD |
|
No of correct prediction: |
409 out of 684 |
326 out of 498 |
|
Winning rate: |
59.21% |
65.46% |
Hypothesis 2:
Based on the shape of the PP lines, we form our expected market direction in this way:
If the PP lines are expanding (R3 of day 1>R3 of day 0 and S3 of day 1 <S3 of day 0), it is expected that day 1 will follow the direction of day 0. We will use trend following strategy.
If the PP lines are getting narrower (R3 of day 1<R3 of day 0 and S3 of day 1 > S3 of day 0), it is expected that day 1 will go to the opposite direction of day 0. We will expect a trend reverse on day 1.
If the PP lines are neither expanding nor getting narrower, we will have no idea on the expected market direction of that day.
|
|
EURUSD: |
AUDUSD |
|
Total no of expansion cases |
225 |
243 |
|
Total no of narrower cases |
266 |
254 |
|
Total no of same direction cases |
192 |
186 |
|
|
EURUSD: |
AUDUSD |
|
No of correct prediction: |
260 out of 492 |
241 out of 498 |
|
Winning rate: |
52.85% |
48.39% |
* no idea cases were deducted to calculate the winning rate
The actual trading performance using breakout or swing strategy will be discussed in the coming analysis.
Conclusion:
In all of the above cases, the winning rate is not very high, PP points trading strategy is better to be implemented with the other indicators together. We may consider the price action or the other trend strength and oscillator indicators later.
