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