Thread: The Truth About Pivot Points

Most forex, futures or stocks traders are familiar with the Pivot Points and the way they are calculated. Futhermore, we are usually told by the "pros" to buy when the price is above the pivot point (PP) or sell when the price goes under the PP.

Is that really so? Can we REALLY make money trading that way?

Mmmm.... Let's take a closer look and separate the facts from the fiction....

A few month ago I put these trading ideas under the microscope. Using forex historical data from January 2002 to December 2007 on the 1 minute time frame, I systematically backtested those famous pivots points that everybody is talking about.
I wanted to know if we could really make any money day-trading the pivot points.

But first let's see the classical formulae used to calculate the pivot point (PP) and the S1, R1, S2, R2, S3, R3 levels,
As you all know, S1, S2 and S3 represent the 3 classic support levels and R1, R2, R3 the resistance levels.
Here is the formulae that we are all familiar with :
PP = (HIGH + LOW + CLOSE) / 3
S1 = (2 * PP) - HIGH
S2 = PP - RANGE
S3 = S2 - RANGE
R1 = (2 * PP) - LOW
R2 = PP + RANGE
R3 = R2 + RANGE

After 909 day-trades, here are the results of the backtest, on the GBP/USD (3 pip spread included)

Hang on in there, those results may surprise you...

Scenario 1 : Buy when the price touches the PP (coming from under the PP) and then goes 1 pip above the PP
, stop at S1 and we close the trade at the end of the day (5PM New York city time) - - - > Loss of 2571 pips

Scenario 2: Do the exact opposite of scenario 1 (meaning we are selling instead of buying, stop at R1) --- > Loss of 2018 pips

Scenario 3: Buy when the price touches R1 (coming from under R1) and then goes 1 pip above R1
, stop at PP - - -> Loss of 1762 pips

Scenario 4: Do the exact opposite of scenario 3, stop at R2 - - -> Loss of 1017 pips

So far, as you can see, we are losing big.

Let's continue our backtest.

Scenario 5 : Buy when the price touches R2 (coming from under R2) and then goes 1 pip above R2,
stop at R1 - - - > Profit of 75 pips.

Scenario 6: Do the exact opposite of scenario 5, stop at R3 - - -> Loss of 1504 pips.

Scenario 7 : Buy when the price touches R3 (coming from under R3) and then goes 1 pips above R3
stop at R2 - - -> Profit of 189 pips.

Scenario 8: Do the exact opposite of scenario 7, stop at the end of the trading day - - -> loss of 1676 pips

The backtest with the S1, S2 and S3 levels produces roughly the same negative results so I won't even bore you to death with them.

As you can see, except for scenario 5 and 7 (buy when the price penetrates R2 or R3), we cannot make any money with these pivots points, at least not the way traders use them normally. The same thing applies to S2 and S3 of course.

And even scenario 5 and 7 are statistically worthless, the ridiculous 75 pips and 189 pips profit that they generate is a joke, the next 75 or 189 pip loss would give us a total of 0 pip or even a loss, so we are back to square one.

So in conclusion it seems rather obvious that these pivots are virtually worthless for day-trading purpose. I did not
backtest the weekly or the monthly pivots but I suspect they might give the same negative results.

Is it possible to use these pivots in other ways (for example in conjuction with technical indicators or candlesticks patterns) and profit from them? I don't know but this possibility cannot be completely eliminated. But so far I don't see any evidence that these pivot points are profitable, at least not the way we usually use them in our day trading activity, so we must obviously find other ways to profit from them, if they are profitable at all to begin with.

Hope this helps someone.