Face the Day Armed with a GAME PLAN When it comes to trading for a living, investors fall into three categories:

• Those that have a trading system
• Those that are developing a trading system
• Those that never believed in utilizing a specific trading system . . . and are still explaining to their spouse how they lost all of their trading capital

The point of this, of course, is to emphasize the importance of facing each trading day with a game plan and a trading system. A very large part of that game plan involves having a specific trading system or setup, and, more importantly, a trading methodology in which to apply to each trading system or setup. Without this combination, a trader is like a wounded antelope in the center of a lion pride, where it is not a question of "if" the antelope is going to get whacked, but rather of "when." For a trader without a trading system, the possibility of ruin it not a question of "if." It's only a matter of "when."

I utilize 8 trading systems in my daily trading routine. One of the simplest and most effective is one I call the "5 Minute Multi-Pivot Play" trading system, which is a trading system I utilize on the mini-sized Dow futures. I also use a similar trading system for the emini S&P, emini Nasdaq and emini Russell futures. For the sake of simplicity, I will focus on the mini-sized Dow trading system in this article.

The main advantage of this trading system is that it is price-based as opposed to a indicator-based trading system. By the time most of the trading software generate a buy or a sell signal, the move is already well under way. By following this price-based methodology, there are many instances where I get into a trade before the indicator-based trading system traders, and I usually end up handing off my position just as a buy or sell signal is being generated on a stochastic or other oscillator type trading system. I do follow a 2, 4, and 13 period exponential moving average as well as a 7 period RSI on each 5 minute chart. I don't use these for signals; I use these to see when these lagging trading software are creating buy and sell signals so I know when the "crowd" is jumping in.

Before we look at how to use the trading system, let's look at its main components:

24 Hour Pivot Levels

First off, let's talk about the pivots: how they are created and how I use them. There is no big mystery or secret to the pivots. This trading software is readily available and have been around for a long time. These are support and resistance levels calculated by floor traders using a simple mathematical formula. These levels became widely known and have moved off floor. Today many day traders are aware of them and try to use them, but in my experience they are using them incorrectly. To add to the confusion, there are different formula versions and different time frames that are used when calculating pivots. So, to get started, let's look at what I use, which is one of the standard pivot formulas:

R3: R1 + (High - Low)
R2: Pivot + (High - Low)
R1: 2x Pivot - Low
PIVOT: High + Low + Close/3
S1: 2x Pivot - High
S2: Pivot - (High - Low)
S3: S1 - (High - Low)
R = Resistance
S = Support

Once a day trader has this formula, then the key data that is needed is the high, low and close of the previous session. For my own day trading, I like to utilize 24 hours worth of data, and therefore I use the 24 hour session from 4:15 PM Eastern to 4:15 PM Eastern. Once I get this high/low/close, I plug these into an excel spreadsheet with the formulas listed above. This information generates 7 important levels for the next trading day: a central pivot, then 3 levels above (R1, R2, and R3) and 3 levels below (S1, S2 and S3). The central pivot has the most weight of the 7 levels. In addition to these daily levels, I also utilize weekly levels (calculated using the high/low/close of the previous week) and monthly levels (calculated using the high/low/close of the previous month). On days where the action is volatile, creating a trading range of over 150 points in the mini-sized Dow or 15 points in the emini S&P, I will also utilize "midpoints." These are literally the half-way point between each of the daily pivot levels. Once the pivots are created and drawn, they will resemble the chart in Figure 1.

Figure 1 shows a trading system on a 5-minute chart of the CBOT mini-sized Dow contract with its corresponding Daily, Weekly, and Monthly pivot levels.

Figure 1 shows a 5-minute chart of the CBOT mini-sized Dow contract with its corresponding Daily, Weekly, and Monthly pivot levels.

It is rare when a stock index hits its R3 or S3 levels, as that is the extreme of the range. This is important to know because if a market rallies to R2 or a sells off to S2, that usually ends up being the dead high or the dead low of the day. This knowledge will help temper a trader's emotions and keep them on track to follow this trading system.

That said, let's take a look at my rules for my trading system while trading the pivots.

Basic Methodology of the Multi-Pivot Strategy:

• 1) I am looking for trades against the pivots. My ideal trades are fades against these levels. If we are rallying up to a pivot level, then I am either already long and am looking for an exit, or I'm flat and I'm looking to initiate a new short position.

For example, the markets rally to a daily level, and I short the move. Or a market sells off to a daily level, and I buy the move. I don't wait for the moving averages or the RSI to confirm the action. Instead, I set up the orders based on the price action. Ideally, I will get MA confirmation at least 20-30 minutes after I place the trade, if not sooner. In truth, the trader can trade this system without the MA confirmations " I just like to see them turn in my direction after I'm in a trade. I know this is when most traders are just now getting in the trade " way too late!

Figure 2 shows a 5-minute chart of the CBOT mini-sized Dow contract with trading system entry and exit levels.

Figure 2 shows a 5-minute chart of the CBOT mini-sized Dow contract with the trading system entry and exit levels.

On Friday, January 16 the price action on the chart is showing 3 trading system setups.

1. As the markets rally to the midpoint near 10565, I set up a short, with my target being the daily pivot that is sitting below at 10529, "plus 3 points" - something I will talk about in my next trading system rule.
2. On a move to the pivot, I close out my short, and end up going long, with my target being the midpoint.
3. After hitting the midpoint, I close out my long, and reverse and go short, with my target being the daily pivot once again.

Now that we have the basic idea, let's go over entry points and stops.

• 2) I enter and exit trades by placing limit orders or buy stops/sell stops + or - 3 points from the multi pivot levels trading software.

• 3) My initial stop is almost always 20 points, never less than that.

Figure 3 shows a 5-minute chart of the CBOT mini-sized Dow contract with trading system entry, exit and stop levels.

1. When I was filled at my short at the midpoint 10565 I immediately placed a 20 point stop at 10585.
2. A long at the weekly level 10532 + 3 at 10535 would mean that the trader place an immediate 20 point stop at 10515. The stop is based on the trader's entry level, not the pivot level.

Figure 4 shows a 5-minute chart of the CBOT mini-sized Dow contract with trading system entry, exit and trailing stop levels.

Figure 4 shows a 5-minute chart of the CBOT mini-sized Dow contract with system entry, exit and trailing stop levels. Figure 4 shows an example of where to move up a stop.

1. Here we have our original 20 stop from our long entry on a decline to the weekly pivot + 3 points.
2. When the market gets within 5 points of my target, I move up the stop up to the same pivot I used as my entry level and subtract 3 points. In this trading system case, the entry pivot was the green dotted line, which is one of the weekly levels. So my stop is 3 points below that level, which is 6 points below my entry (since my entry was weekly pivot + 3 points).

• 4) After 2 losers in a row I quit for the day.

• 5) With this trading system, I trade 1 contract for each $12,500 in my account. For accounts I manage, I trade 1 contract for each $25,000 in the account.

• 6) Ignore new trading system setups between 12:00 Noon ET and 2:00 p.m. ET.

Summary

Those are the trading systems and rules I follow. What is nice about this trading system is that the trader doesn't have to watch it very closely once he is in a position. I'm not an aggressive trailer of stops. I like to get in a position, set my parameters, and then focus on other things. Depending on the trader's work situation, he could do this at the office, especially on the West Coast. He could set alerts for the key levels, and then when the markets