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Combining Pivots with Indicators
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In this chapter, my goal is to explain the importance not only of what it

takes to develop a trading system but also of how to evaluate it from a hypothetical standpoint and then apply it with real money. I am going to draw together what we have learned so far and help you learn how to de velop a trading program and what to look for so that you can expand your creative drive to expand into other systems. This chapter will reveal how we integrate pivot point analysis with three popular trading indicators: sto chastics, moving average convergence/divergence (MACD), and a pivot point moving average method. There are many factors to consider in a me chanical trading system; but when you get right down to it, there are really only three main elements you want to focus on:

1. Clear-cut rules for entries and exits.

2. Rules for exiting at profit targets.

3. Rules for exiting at loss targets.

First, we need to define the terms that are important for understanding the dynamics of a trading system and how to extrapolate the information. The best way to benefit from this information is to uncover not whether the overall system or trading idea is profitable but whether it is profitable with limited equity swings: Does the method have excessive drawdown periods? Do losses exceed gains more than what is tolerable to equity traders? When a string of multiple winners and substantial profits accrue, does the trading method experience periods of time that result in significant losses that give

back the majority of those gains? That is what we refer to as drawdowns. The best part of using this information is not only to help you determine what benefits or validity your trading ideas hold but also to help you un derstand and identify the negative side of the system or to spot the weak nesses, such as the drawdown factor. One of what I would consider the top-10 destructive traits traders possess is that they overtrade—not just in and-out style, but abusing the power of leverage and trading too many positions at once

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