8 Questions to Ask Before Using Day Trading Pivots

The number of Retail Day Traders (those trading for themselves and not on behalf of an institution) represent the fastest growing segment of financial market participants. With the broad availability of real-time data at little to no cost, the barriers to entry are lower than ever.

But, access to high quality chart & quote platforms is not a guarantee of success. Therefore, traders add technical indicators, trading strategies and even Algorithms to improve their results. Among the most widely used trading metrics is a “Daily Pivot” strategy.

The concept is simple enough: Day Trading Pivots identify the inflection price at which Buyers reside above the Pivot and Sellers await below the Pivot.

From the viewpoint of an Algorithm Developer, below is a list of questions, suggestions and pitfalls you should consider before using a Trading Pivot strategy.

1. Is the methodology widely available for free?

There’s an old market adage “What everyone knows, is seldom worth knowing?” Simply put, if anyone can access the strategy at no cost, what possible “Edge” can it provide for you?

More importantly, a widely used free strategy can be exploited by larger market participants to shake you out of trades placed at obvious price levels.

2. Is the methodology based on Day-Session data or 24 hour trading data?

Most markets now trade throughout the Day Session and Overnight Session. If the metrics you’re using only analyze data from the Day Session, you’re not getting the full picture of market activity and the Pivot levels will produce random results.

3. How long is the data series that is used to determine the Pivot?

The most common Daily Pivot formula (Google it) is derived only from the High, Low and Close of the previous trading session. Is it logical to assume that today’s key inflection price is determined solely by what happened the day before? What about the trading activity that occurred during the last week, or the last month, or the last three months, six months or twelve months?

Seek out a strategy that uses Multi-Cycle analytics that take into consideration short-term, intermediate term and long-term data. Even though we’re talking about strategies to derive the “Daily” pivot, the inflection price for any given trading day is based on the accumulated market behavior over much longer time cycles.

4. Is the Pivot strategy designed for use by Retail Traders or Institutional Traders?

It’s a simple fact (and a harsh reality to many novice traders) that Institutional Algorithms are designed to exploit the emotional biases of Retail Traders. But, don’t despair. There are very talented Algo Developers that use Institutional Quality metrics and make these strategies available for Retail Traders.

5. Can the developer describe the “Logic” premise they used to build the strategy?

While a developer will not reveal the formula used to build their algorithms, many will be happy to explain the underlying logic premise upon which their system is built. Seek out developers that demonstrate this level of transparency.

6. Does the developer of the Pivot strategy provide chart evidence to validate effectiveness?

The perfect trading system has not been developed, and never will be. The point is to find a methodology that has provided users with a discernible advantage over time (the longer the better) and provides a level of efficacy in Bull and Bear markets.

7. Has the Pivot strategy been tested on multiple types of Financial Instruments?

This is what separates high end, repeatable algorithms from those that go through sporadic periods of effectiveness and ineffectiveness. Algorithms that are based solely on the price of the underlying financial instrument are unreliable. This is because “price” is an infinite quantity. And, you can’t anchor a consistent, repeatable algorithm to an infinite metric.

However, “Time” is a Physical Quantity. It cannot be changed, added to or subtracted from. Algorithms that are based on metrics of Time and Price provide a more accurate data set. Additionally, algorithms based on Fractal Geometry will tend to have much greater predictive value.

If the trading system or algorithm works on multiple types of financial instruments without modification, it’s likely that it was designed based on Fractal Geometry and Multi-Cycle analytics. That’s exactly what you want.

8. Does the developer allow a trial period to determine if the system is right for you?

The point here is not whether an Algo developer offers a free trial or not. Some do. Some don’t. The larger issue is whether you can try out the system or methodology without long term commitments.

Find a developer that offers a monthly membership that can be cancelled at any time. After one month, you’ll know if the system is right for you.

About the Author: Mark Anthony has been trading for 44 years and set out five years ago to provide Institutional Quality algorithms for Retail Traders. The algorithms are based on Fractal Geometry, Multi-Cycle analytics and Time-Price physics.

You can contact the author by email: anthony-mark@visual-algo.net and find out more at www.visual-algo.net