Mark B. Fisher, founder of MBF Clearing Corporation and well-known futures trader, inspires this week’s system trading idea. Fisher published The Logical Trader, Applying a Method to the Madness in 2002, in which he introduced several novel concepts to a larger trading audience, including pivots. I do not know if he invented pivots, but there is no doubt he popularized them.
To calculate the pivot price, simply use formula:
(High + Low + Close) / 3
That is all there is to it. Fisher teaches a lot of different applications using pivots, but I will focus on one: the pivot moving average. The pivot moving average (PMA) is simply the average of the pivot calculation over a specified number of bars. In The Kindergarten Trader section (pp. 129-132) of his book, he provides a trading pattern so simple, a kindergartner can trade it.
I always say, simpler trading systems are better, and this idea is about as simple as it gets. Let us see if this idea produces a tradable system.
Phase 1: Plan & Design
1. Trading Idea
This idea uses three PMA’s: 14, 30, and 50 period. The direction of the PMA’s tell us what to do:
- If they are all going up, we are long
- If they are all going down, we go short
- If we are long and the PMA slopes down, get out
- if we are short and the PMA slopes up, get out
Mark Fisher indicates that we don’t even need price on a chart to see where our trades would be. This is a chart with only the three PMA’s and no price information:
That is it.
2. System Definition
I will use the following position sizing:
- Futures: 1 contract
No inputs are needed for this system.
|PMA14||Double||0||14-period pivot moving average|
|PMA30||Double||0||30-period pivot moving average|
|PMA50||Double||0||50-period pivot moving average|
- If PMA14 > PMA14[1 bar ago] and
- PMA30 > PMA30[1 bar ago] and
- PMA50 > PMA50[1 bar ago] then
- Buy next bar at market
- If PMA14 < PMA14[1 bar ago] and
- PMA30 < PMA30[1 bar ago] and
- PMA50 < PMA50[1 bar ago] then
- Sell short next bar at market
- Profit targets: none
- Stop Loss: non
- If PMA14 < PMA14 then
- Sell next bar at market
- If PMA14 > PMA14 then
- Buy to cover next bar at market
3. Performance Objectives
The system will meet the following objectives:
|System Type (trend, mean-reversion, day, swing, etc.)||Swing|
|Risk of Ruin||0%|
|Profit Factor||>= 1.5|
|Win Percent||>= 50%|
|Max Drawdown %||< 35%|
|Profit/Drawdown Ratio||>= 2.0|
This idea is S.M.A.R.T.: Specific, Measurable, Achievable, Realistic, Time-bound
4. Market Selection
|Energies||Heating Oil, Crude Light, RBOB Gasoline, Natural Gas||HO, CL, RB, NG||Mark Fisher was an energies trader, so we must test on energies|
|Currencies-Futures||Futures: Euro FX, Australian Dollars, Canadian Dollars, British Pound||EC, AD, CD, BP|
|Agriculture||Soft Red Wheat, Oats, Soybeans, Corn||W, O, S, C|
|Metals||High Grade Copper, Silver, Gold||HG, SI, GC|
|Index Futures||E-minis: S&P, Dow, Russell 2000, Nasdaq||ES, YM, RTY, NQ||The usual suspects|
Chart Type, Timeframe, Session, Time Zone:
|Chart Type||Regular Candlestick||Charting is only useful for validating entry and exit signals|
|Timeframe / Interval(s)||Daily|
Phase 2: Build
5. Manual Test
This idea was so simple, it was easy to find trades. It passed my manual test easily.
7. Unit Test
Simplicity rules the day. The unit test was fine and dead-simple to validate. Here is a chart with only the three pivot moving averages, no price data, and only system entries and exits:
(Give yourself a gold star if you know the instrument.)
Note: Unit Test verifies that the system is executing the trading rules correctly. It is, essentially, quality control.
Phase 3: Test
No optimization is needed, so we keep on rolling!
9. Walk-Forward Analysis
I performed walk-forward analysis on a period from January 1, 2011 to November 1, 2020. Everything failed at Profit Factor (our goal was 1.5), so there is no reason to go any further. Here is a set of the best performing instruments:
10. Monte Carlo Simulation
Nothing passed, so not Monte Carlo Simulation this week. I am starting to miss doing Monte Carlo simulations.
We did not make it this far.
Phase 4: Deploy
We did not make it this far.
Trading System Result: FAIL
Notes and Commentary
It is difficult for me to be too disappointed with the system results, mainly because it was so easy to develop and test. The idea is novel in the use of the pivot value, but it is still price data in the end. It was pretty fun and refreshing drawing charts without price bars. The results of the tests were not horrible, so there may be some use for pivot moving averages.
From the Continuous Improvement department, here are some ideas for the next version of this system:
- Use Fibonacci sequence for moving averages, such as 8, 13, 21, 34, and 55.
- Use an ATR trailing stop, such as I used with the 40in20out system.
- Try different timeframes: 60, 240, 360, 480 minutes; weekly.
And there you have it, a system fit for a kindergartner. This was simple, as stated in the introduction, and it performed better that last week’s system, which was similar (three moving averages) but highly complex in it’s rules. Occam’s razor rules the day. I have a lot of other ideas from The Logical Trader that I will present in later posts, so make sure to check back here every Friday or so.
Thank you for reading and I hope you enjoyed. Feel free to leave a comment below and let me know what you think.
Next week’s idea: I am not certain about this yet, but I have been thinking about a different kind of Fisher: Fisher Transform. Tune in next Friday and see what I come up with.
- The Logical Trader, Mark B. Fisher
- The Logical Trader resources at MBF Clearing Corporation
- Occam’s Razor @ Wikipedia
Did you like what you read? Do you want to see more? Subscribe now and receive our weekly email, with the Trading System Idea of the Week and other fun stuff.
Don’t worry, we will never, ever, ever sell, overuse, or donate your email address. Promise.