SAT2021-17 Kindergarten Trader 1

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

Position Sizing:

I will use the following position sizing:

  • Futures: 1 contract

Input Parameters:

No inputs are needed for this system.

Variables:

VariableData TypeDefaultCalculation
PMA14Double014-period pivot moving average
PMA30Double030-period pivot moving average
PMA50Double050-period pivot moving average

Entry:

  • Long:
    • If PMA14 > PMA14[1 bar ago] and
    • PMA30 > PMA30[1 bar ago] and
    • PMA50 > PMA50[1 bar ago] then
    • Buy next bar at market
  • Short:
    • 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

Exits:

  • Long:
    • If PMA14 < PMA14[1] then
    • Sell next bar at market
  • Short:
    • If PMA14 > PMA14[1] then
    • Buy to cover next bar at market

Challenges:

  • None. 

3. Performance Objectives

The system will meet the following objectives:

ObjectiveGoal
System Type (trend, mean-reversion, day, swing, etc.)Swing
Walk-forward Efficiencyn/a
Risk of Ruin0%
Profit Factor>= 1.5
Win Percent>= 50%
Max Drawdown %< 35%
Profit/Drawdown Ratio>= 2.0
Ready Date2021/05/28

This idea is S.M.A.R.T.: Specific, Measurable, Achievable, Realistic, Time-bound

4. Market Selection

Markets:

EnergiesCurrenciesFixed IncomeAgricultureMetalsSoftsIndexesEquities
XXXXX

Instruments:

Market SectorInstrumentSymbolComments
EnergiesHeating Oil, Crude Light, RBOB Gasoline, Natural GasHO, CL, RB, NGMark Fisher was an energies trader, so we must test on energies
Currencies-FuturesFutures: Euro FX, Australian Dollars, Canadian Dollars, British PoundEC, AD, CD, BP 
AgricultureSoft Red Wheat, Oats, Soybeans, CornW, O, S, C 
MetalsHigh Grade Copper, Silver, GoldHG, SI, GC 
SoftsSugarSB 
Index FuturesE-minis: S&P, Dow, Russell 2000, Nasdaq    ES, YM, RTY, NQThe usual suspects

Chart Type, Timeframe, Session, Time Zone:

AttributeValueComments
Chart TypeRegular CandlestickCharting is only useful for validating entry and exit signals
Timeframe / Interval(s)Daily
SessionRegular 
Time ZoneExchange 

Phase 2: Build

5. Manual Test

This idea was so simple, it was easy to find trades.  It passed my manual test easily.

6. Build

Process Diagram

Comments:

None.

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.)

Complete?

Note: Unit Test verifies that the system is executing the trading rules correctly.  It is, essentially, quality control.

Phase 3: Test

8. Optimization

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. 

11. Incubation

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.

Sources/References

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