Pivot Reversal Strategy

Overview

The Pivot Reversal Strategy is a breakout trading strategy that combines the concept of pivot support and resistance levels. It takes reverse positions when the price breaks through the pivot levels. The strategy is simple and easy to implement, making it a short-term breakout trading strategy.

Strategy Logic

The strategy first calculates the highest and lowest prices over a specified period (e.g. 4 bars) as the pivot resistance and support levels. It then monitors price action in real-time and determines if the price breaks through the pivot levels. Specifically:

1. Use the pivothigh() function to calculate the highest price for the pivot resistance swh
2. Use the pivotlow() function to calculate the lowest price for the pivot support swl
3. Go short (strategy.short) when prices break above the pivot resistance swh
4. Go long (strategy.long) when prices break below the pivot support swl

The strategy logic is simple and clear - take reverse positions when prices break pivotal levels. It also incorporates trading hour control to avoid overnight risks.

Advantage Analysis

The pivot reversal strategy has several advantages:

1. The strategy idea is simple and easy to understand for beginners.
2. Using pivot levels to determine trend reversal is robust against short-term market noise.
3. Only trading on pivotal breakouts avoids excessive trade frequencies.
4. Trading hour control helps avoid overnight risks.
5. The concise code is easy to optimize.

Risk Analysis

There are also some risks to note:

1. Pivot levels do not guarantee perfect trend prediction and false breakouts are possible.
2. Pivotal signals alone may cause premature entry. Other indicators should confirm the trading signal.
3. It does not consider market regime and individual stock traits, leading to systemic risks.
4. Blurred support and resistance increase the chance of failure in breakouts.

To control risks, recommended optimizations include using moving stop loss to follow the major trend, pairing stocks with market conditions, and reducing false breakout rates.

Optimization Directions

Considering the risks, future optimizations can focus on:

1. Optimizing pivot parameters like increasing calculation period to improve success rate.

2. Adding moving stop loss to follow the major trend and reduce reversal risks.

3. Incorporating other indicators like MACD to confirm trend and avoid false breakouts.

4. Classifying stocks by traits and setting unique parameters.

5. Optimizing trading hours for different markets like US and HK stocks.

6. Considering overall market trend for selective trading.

Conclusion

Overall, the Pivot Reversal Strategy is a great simple breakout strategy for beginners to learn. It identifies reversal levels cleanly using pivot points. While risks exist, optimizing parameters, stop loss, trading hours and incorporating indicators can turn it into a robust short-term trading strategy.