Risk Management

Risk Management is very important in trading. Today (2nd Nov 2020) i will loss 1 month+ profit in a single day. This is a horrible thing. One should manage the risk appropriately and have a limit on no of trades and maximum loss per day.

Setting for myself the limit to 3 trades max per day and 2000 Rs as the loss limit. 

BankNifty Intraday Trading Strategy

This post details about a intraday trading strategy for Banknifty. There are below things we need to observe to get the direction of the index.

1. SuperTrend (10,2) at 15 min time interval, Green UP, Red DOWN.
2. VWAP, Price > VWAP UP, Price < VWAP DOWN.
3. ADX(14,14) RED line above DOWN, GREEN line above UP
4. RSI(14), <50 DOWN, >50 UP
5. PSAR(.02, .2) above price DOWN, below price UP.
6. PCR ratio (on Analyst tool) rising UP, falling DOWN.
7. OI change, More calls written DOWN, more puts written DOWN.
8. Volume, is very important.
9. VIX, mostly falls when market going UP and rises when market going DOWN.

Some Observations

1. DOWN movement stops most of the time once PCR ratio goes near ~.5-~.6 or RSI near 18.
2. UP movement stops most of the time once PCR ratio goes near ~1.5-1.6 or RSI nears 85.
3. Most of the days market goes in one direction or remains sideways, very rarely it swings on both sides. 
4. If the market has lot of shorts or longs in both futures and options and it goes in opposite direction it generally swings big as there is lot of short covering or long liquidation. 
5. When the market closes at day high or day low with a big move, generally it continues in the same direction next day.
6. VWAP acts as a good support and resistance when data is clearly bullish or bearish.
7. In case of confusion between Data and technical's check data of current strike and 1 strike above and below.
8. Use Butterfly spread on expiry day based upon the point where market may end. Has a very good risk reward ratio.

Exit Strategy

1. 10:30 to 12:30 market slows down and does not moves, good time to exit half position.
2. End of the day. Generally market moves in 1 direction only.
3. When we see a large candle with big volume.
4. Stop Loss hits.
5. There is a shift in the data to the other side.
6. On Expiry day book profit around 10:30 AM, 1:00 PM, 2:00 PM and then according to above rules.

Things which can cause loss

1. Playing against the trend. (Should never happen)
2. Market goes both sides. (Happens 20% days, book profit regularly)
3. Wrong stop loss. (Will get better with experience)

Reversal Pattern

Pramod Rao Options Strategies

1. http://optionsnext.com/buying-options-trade-selection-process-explained/

2. http://optionsnext.com/the-lazy-trader-august-2019-series/

3. http://optionsnext.com/a-new-series-rs-2000-options-june-2019/

4. http://optionsnext.com/bucking-the-trend-new-series-september-17-2020/

5. http://optionsnext.com/weekly-warrior-strategy-12-weeks-review/

6. http://optionsnext.com/money-in-the-bank-the-journey-so-far/

BankNifty Strategy Details

1. Concept is good stocks always perform better than index.
2. Sell HDFCBANK, KOTAKBANK, ICICIBANK Puts 2% away.
3. Hedge by buying Banknifty monthly options at 3.5% from spot.
4. Net credit at start of the series is around ~30k mostly.
5. In the mid of the series net credit goes down to ~15k mostly.

Economics And Finance Videos

1. How the economic machine works by Ray Dalio
2. Managing Money in a zero interest environment by Ray Dalio

Stock Market Books

Trading

• Varsity by Zerodha
• Mastering the trade by John Carter
• Trading in the Zone by Mark Douglas for Trading psychology
• Disciplined Trader by Mark Douglas for Trading psychology
• Definitive guide to position sizing by Van Tharp for Money management
• Market Wizards by Jack Schwager
• Trading for a living by Alexander Elder

Technical Analysis Videos And Articles Curation

1. Trend Lines by Subhadip Nandy
2. Dow Theory 1 by Subhadip Nandy
3. Peak And Trough Analysis by Subhadip Nandy
4. Zig Zag or Dow Theory by Rishikesh
5. Dow Theory by Gaurav Bissa
6. Systematic Trading By Manu Bhatia
7. Mitesh Patel Elearnmarkets
8. OI Pulse by ShivaKumar
9. Scalping by Asin Baran Pati

Youtube Channels

1. Options Scalping
2. Elearnmarkets
3. P R Sundar
4. Subhadip Nandy

Fundamental Analysis Videos And Articles Curation

Curating the list of good videos for fundamental analysis

1. Varinder Bansal
2. Naresh Nambisan
3. Momentum Trading by Alok Jain

Predictive Analysis - Making sense of participant wise open interest data

There is a strong correlation between FII's shorting the market and it going down.

In the analysis of last 120 days data we can see FII's had built huge short positions in the month of Feb 2020 and  the market crashed in March 2020. They closed all the shorts around March 20, 2020 after which market stabilized and started going up.

Last 365 days data analysis shows market was preparing to fall in the month of Sep 2019.

Last 5 years data shows bull run in 2016 first 7-8 months, then a down move. Then again a bull run in 2017.

Predictive Analysis - Making Sense of options chain

Options chain is a beautiful piece of data to analyze

1. Which side market can move
2. How much market may move

Related Videos

1. https://www.youtube.com/watch?v=vwSjRO4wGYE&t=2282s
2. https://www.youtube.com/watch?v=mMTy9VXaUR0&t=1597s
3. https://www.youtube.com/channel/UC0kKxsSzUbJdbfRo89CuxIw

Manu Bhatia Trading Strategies

Can be followed at

1. Telegram
2. Twitter

Trades mostly BankNifty options both Intraday and Positional

1. Uses ATR/Supertrend with 15 min interval and uses options strategies to trade.
2. Trades big quantities when he expects that market has moved to an extreme direction and will give a big move.
3. His positions are always hedged when trading directional.

Mitesh Patel Trading Strategies

Can be followed on

1. Twitter
2. Telegram

Mostly a price action trader.

Index Options Selling

1. Seems like uses Normal Distribution Concept that probability of more than 2 sigma events is <= 5%.
2. Uses mainly technical analysis like Trend Lines, Support Resistance, Gap Theory etc to asses the direction of the market.
3.  Sells options in the opposite direction of the market mostly at 2 sigma distance. Keeps on moving the options as the market moves.

Expiry Day Options Trading

1. Sells massive quantities of options on weekly expiry in indexes.
2. Most of the money he makes from this only.

Stocks Futures And Options

1. Trades large quantities of futures and options of stocks based upon the breakout strategies.
2. By breakout i mean crossing the 52 week high and low. 

P R Sundar Trading Strategies

Can be followed on

1. Youtube
2. Blog
3. Twitter

Index Option Selling

Uses below things mainly for this

1. Open interest in the option chain.
2. How the markets are moving worldwide.
3. What are the current news at the world and India level.
4. Keeps an eye on monthly data like Inflation, IIP, Auto Sales etc.
5. Uses technical analysis like Moving Averages, Fibonaaci retracement etc for guessing how things may move.
6. Uses lot of his past learning and understanding also.
7. Trades short straddles mostly.

Expiry Day Options Trading

1. Sells OTM options on expiry day in massive quantities.
2. Plays Straddle one day prior to expiry to capture the Theta decay.

Results Options Trading

1. Before results time the volatility of options rises a lot. 
2. He sells options by guessing where the stock could move to capture the fall in option premium once results are out.

Covered Calls

1. For the stocks in his portfolio he keeps on selling calls to make rent out of the stocks he already owns.

Cash Secured Puts

1. Sells OTM puts in good stocks with the hope that stock won't fall below that price.
2. Is ready to buy the stock if it goes below a certain price.

Personal Favorite Strategies

Finding Trend

1. Super Trend Based Strategy
2. Gap Theory
3. Support And Resistance
4. Chart Patterns
1. Ascending/Descending Triangle
2. Rectangles
3. Double/Triple Bottom
4. Double/Triple Top

Trading Strategies

1. BankNifty Hedging Based Strategy
2. Normal Distribution Based Strategy
3. Super Trend Based Strategy
4. Options Strategies
1. Naked Option Buying
2. Buying Using Option Spread
3. Butterfly
4. Condor
5. Calendar Spread
6. Strangle
7. Straddle
8. Synthetic Futures
9. Asymmetric Calendar Back Spread

Strategies To use

1. Mid Term --1 day Super Trend
2. Swing Trading --1 hour Super Trend
3. Intraday -- 3,5,15 min Super Trned, VWAP etc
4. Hedging based -- Nomral distribution based, Banknifty Pramod rao one

Articles

1. Short Straddle
2. Intraday Short Straddle

BankNifty Hedging Based Strategy

Idea

Strong stocks don't fall as much as other stocks and they go up much more as compared to weak stocks.

Strategy

In BankNifty we can use this concept by

Selling Put of HDFCBANK, KOTAKBANK, ICICIBANK 2-3% strike away and hedging it by buying 3 lots of Banknifty at 3.5%-4.5% price away.

http://optionsnext.com/money-in-the-bank-june-2020-series-june-02-2020/

https://optionsnext.com/money-in-the-bank-testing-of-assumptions-by-mr-sumoy-goswami/

Swing Trading Strategy

Buy When SuperTrend is Green

Sell When SuperTrend is Red

Can be used at 15 min interval

When to expect a big move in the market

Today i spent little time on noticing when does the market makes a big move.

I found below main patterns (Checked on BankNifty)

1. When there is an unusual silence or no move for 1-2 days.
2. Unexpected Big move against market trend.
3. Near Support and Resistance levels 

We should never trade blindly and

1. Always use technical indicators to confirm the move
2. Use appropriate risk defined strategy to trade the move.

Silence and Big Move

The Circled point shows how a big move came after period of 1-2 days silence.

Unexpected Big move against market trend

Support And Resistance Line

References

1. https://www.elearnmarkets.com/blog/nr4-and-nr7-trading-strategy-setup/

Trading Using Support And Resistance

Support And Resistance is one of the theory which works quite well.

Sharing below two posts in which a full time trader has very clearly explained how to use this theory

1. https://medium.com/@nareshbahrain/the-technical-charts-behind-titan-how-virginpriceaction-was-used-to-buy-the-scrip-at-rock-60d1a54d018e
2. https://medium.com/@nareshbahrain/technicalanalysis-hdfclife-117624dd9161

SuperTrend Based Strategy

SuperTrend is one of my favorite indicator to access where the market will move at Daily level.  

This can be checked in Zerodha. Default settings of Period--7, Mutliplier--3 is ok to use.

The idea is 

• Buy When Price > Supertrend or Suprtrend is Green.
• Sell  When Price < SuperTrend or SuperTrend is Red. 

This can be used at all intervals

• 15 min
• 60 min
• 1 day

Also the indicator can be used with different modes

• 7,3 or 10,3
• 7,2 or 10,2

If the multiplier is large stop loss will be larger.

Below chart shows the indicator on Nifty. It works in similar manner for stocks also.

Longest Sequences

I was interested in the below questions from long time

1. If Nifty falls or goes up for how many days it keeps on moving in the same direction. What kind of distribution that data follows?
2. What is the %age change which happens in one move?

I was interested in this because if we are buying or selling options it can help us to know for how long to keep the position open from time and %age move perspective.

So i did some analysis and below are the findings for the same at the weekly and daily level.

Nifty Weekly Longest Sequence (23 years data)

X Axis -- No of days
Y Axis -- Frequency

Min      -46.63      Max         29.24
Mean 0.60       StdDev     7.58

Nifty Daily Longest Sequence (5 years data)

X Axis -- No of days
Y Axis -- Frequency

Max     13.24 Min    -18.09

Mean -0.04     Stdev  2.13

Reference 

Trading using Gap Theory

Gap theory is another powerful tool to predict the direction of an instrument. Mainly below gaps are important.

1. Gap Up : Buy the stock
2. Gap Down : Sell the stock
3. Gap Covered : Buy/Sell based on other indicators  

Posting the Reliance stock with all the marks with gaps and what to do on each one.

One other concept called gap covering is important, usually the theory is all gaps get covered but that works mostly in indexes like Nifty and BankNifty.

References

https://www.5paisa.com/school/gaps-technical-analysis

Options Strategies Cheat Sheet

To make money from market options are very beautiful instruments. True to their name options give one lot of options and let define strategies according to one's risk appetite. Now there can be various scenarios in the market and one can have different expectations at different times what kind of move an instrument will give. At high level i categorized it into 3 categories.

1. Big Move      -- >=  5%
2. Small Move  -- 2% - 3%
3. No Move       --  < 1.5 %

It will be helpful if we have a well studied handy cheat sheet to play all the situations and with the same thoughts i have created this excel sheet.

Options Cheat Sheet.

Tools References

1. https://opstra.definedge.com/strategy-builder
2. https://www.elearnoptions.com/Home/Index

Theory References

1. https://zerodha.com/varsity/module/option-theory/
2. https://zerodha.com/varsity/module/option-strategies/

Asymmetric Calendar Back Spread Strategy

Recently market shot up to 9900 and as a trader if one was expecting it come down, one could have bought put options to make a good profit.

Now two questions arise 

1. What put option to buy?
2. How to minimize the risk in case the view goes wrong.

For the first question lets say we conclude through some analysis that market will come down to 9200 levels from where it shot up and we are OK to buy 9500 PE.

Now we are left with the second question how to minimize the risk. There can be various strategies possible

1. Buy naked 9500 PE 7th May 2020 put, Max risk would have been 50 * 75 = 3750
2. Do a bear spread Buy 9500 PE 7th May 2020 put, Sell 9000 PE 7th May 2020 put, Max risk n that case would be been maybe around [50 (9500 PE) -15 (9000 PE)]* 75 = 2625

But i had an observation and seems like using the reverse calendar spread we could have reduced our risk a lot

We could have chosen 

1. Buy 9500 PE 7th May 2020, Sell 9000 PE 14th May 2020. Max risk would have been (50-40) *75 = 750 
2. Buy 9500 PE 7th May 2020, Sell 8500 PE May 2020. Max risk would have been (50-50)* 750 =  0.

In both the cases as the market fell it gave a profit [(Sell- Buy) * Lot Size] of

• 9500 PE 7th May (300-50)  * 75 = 18750. 
• 9000 PE 14th May or 8500 PE May (50-100)*75 = -3750
• Net Profit 18750 - 3750 = 15000

This Gives us a risk reward ratio of 1:20 or even more. On the other hand trading the naked or bear spread strategies would have given us a risk reward ratio of 1:5 only.

This strategy could be explored for doing weekly options trading to get FD like income also. Need to explore this further.

Normal Distribution Based Strategy

Normal Distribution

In probability theory there is a distribution called Normal distribution. The above curve gives the probability of a move based upon mean and standard deviation. As we can see above the probability of a 4+ standard deviation move is almost zero.

Nifty Weekly Returns Distribution

Now lets look at the nifty weekly returns distribution over last 24 years data.

Max         15.44%

Min        -15.95%

Mean       0.25%

StdDev 2.986035538


BankNifty Weekly Returns Distribution

Similar Analysis for the BankNifty, Last 12 years Data 

Min     -19.27%

Max     +15.45%

StDev 4.040712925

Mean 0.24%

Strategy

Since the market fell very quickly in the month of March, this raised the volatility to very high levels.  Due to this even the options which were 15% to 20% away from the spot were giving more returns as compared to FD if one sold them. Using the Normal distribution theory and selling options ~20% away from current Nifty value, i was able to make good profit over last 7 weeks.

Banknifty Analysis on last 5 years data

Analysis on one lot.

5% -- 230 (2712), 30(9788) -- 327000, 88.46% times profit, 186% annual return

6% -- 243 (1755), 17(10745) -- 243800, 93.46% times profit, 138% annual return

5% loss pay off graph

6% loss pay off graph

Related Videos

1. https://www.youtube.com/watch?v=XP2IUUO4b3M&t=2416s