This system is very simple, easy to understand, and has numbers backing it. That being said, it’s all about testing your skill to see if you can make it work. Remember even if you are guaranteed a 10% edge, a majority of people will still lose money hand over fist.
Technically, one could argue that this is half a system, but I digress.
Now, let's get to the system.
The thing we need to do is establish a pattern in the market that happens consistently that creates opportunity.
This sounds like it will be very hard, but it’s not. There is essentially an endless amount of ways you can do this, but there is no reason to over complicate it so we will take one of the easiest ways I know how. And we will do it using a tool everyone is familiar with.
That tool is a pivot point. Just the pivot. No other levels.
In case you didn’t know, a pivot is essentially a 1 period Typical Price(HLC/3) MA shifted forward 1 period.
What is really interesting is a pivot has roughly a 75% chance of being hit each period. This is regardless of the pair you are trading, or of what period you are drawing your pivots (Daily, Weekly, Monthly, 1 Minute, 5 Minute, etc).
The hit rate varies from at least 70% and sometimes goes all the way to 80%+ but usually sits around 73-76%.
This is our pattern that creates consistent opportunity in the market. It essentially creates opportunity every day, week, month, hour, etc).
We can now create our trading rules.
In this case, we are trading the traditional pivot that is drawn each day. If you are looking at weekly pivots, switch out day for week, etc.
We can only enter a trade long if:
- Price is below the Pivot when the next day begins.
- Price has not yet touched the Pivot.
We can only enter a trade short if:
- Price is above the Pivot when the next day begins.
- Price has not yet touched the Pivot.
We can only exit a trade if:
- Price hits your take profit set at the pivot.
- Price hits your stop.
The Skill Check: It's your job to figure out where to place your stops, how to manage/trail them, and when to enter as long as the entry conditions above are met.
REMEMBER: Pivots can be drawn using any period, you don’t need to stick to the daily period. You can use large or smaller periods. I will say, using smaller periods makes your trading much harder because your transaction costs will be very high relative to the trading opportunities created. I like the spread to be less than 10% of the opportunity created. If the spread is 3, I want to see a 30 pip opportunity or larger.
Let’s say you like to trade using a 1:1 RR. The skill check is to see if you can capture an event that happens 75% of the time, at least 51%+ of the time using a 1:1 RR.
Say you like to use a 1:2 RR. Then can you capture this move more than 33% of the time using those parameters? Remember it happens 75% of the time, so if you know how to time the market, it is very possible that you can capture it at least 34%+ of the time.
Some will say it can’t be done, but it can. Many people trade pivots, and this is why some trade it profitably and others don’t. Some have the skill, some don’t.
Now let’s talk about the rules of participating in this thread so we can keep this lively and more importantly, actionable around here.
Rules of Participation:
- If you are posting trades/charts you MUST identify the following:
- The pivot level being traded (what period is it, and what pair are you trading).
- All pivot levels must be shown either with the tool provided, your own, or hand drawn.
- You do not need to share your entry/risk management methods beyond the rules shared on the first page. If you want though, feel free to. For those who think I am doing other traders a disservice by “concealing” rules, chances are, you will lose using other people's rules anyway (see study above).
- Everything involved with the skill check part of the system is open for discussion/development here. If you want to share entry/risk management ideas and build upon others, please do so. However, if you are sharing, it all must still incorporate the original rules outside the skill check.
Provided Tools:
Attached is an indicator I coded up for us. It’s simply a MTF pivot. You can set which period pivots you want to see and it will plot it on the chart. It will also plot the pivot hit probability if you’d like to display that as well.
I have also attached an image new traders will find useful. It essentially shows you the different win rates you need to break even depending on your RR Ratio.
More tools come...
I posted this on a friday on purpose. For those who read it and find it interesting, you have a weekend to download the indicator, look at the charts think about how you can pass the skill the check.
Come monday, I'll be posting all the weekly opportunities created and few of the daily ones that look interesting.
For those who want to share their entry plan, feel free, for those who just want to share there trade after the fact, feel free. We are all looking at the same opportunities. What will separate the boys from the men is those who can pass the skill check, and those who can’t.
Example Trade/First Chart:
This is a trade I took this AM. Longed USDCHF with a 1:2 RR. Remember, price moves to the pivot like this 78.50% of the time. It’s very possible to capture that move with a 1:2 RR more than 33% of the time, that is, if you have any skill. Today was an easy day. If you bought anytime before the pivot was hit you would have made money with a 1:2 RR. Most days are not like this.
