What constitutes Quant Trading and what does not?

What constitutes Quant Trading?

Those of you who follow Indian finwit would have noticed the sudden appearance of the word “Quant”, as if almost everyone has had an overnight epiphany, and in some cases akin to some sort of ‘born again’ revelation. To me it looks like a thoroughly misplaced appropriation of the term. Read on to know more.

So let me clear the air about what actually is Quant Trading, the word Quant refers to Quantitative and Quant Trading is essentially a subset of Quantitative Finance.

Late Prof. Mark Joshi had written a note titled “On Becoming a Quant” in which he intelligibly describes what Quants do.

The operative word here is “mathematical models”. Of course this can include probabilistic and statistical models as well.

So to sum it up, Quant trading is the application of Mathematics, Statistics and Probability theory in the area of trading.

For example, if you are looking at a simple Moving Average Cross over system, you may want to calculate the Conditional Probability and the Probability Distribution for various outcomes in terms of price. But merely trading a Moving Average Cross over system without having done the statistical work does not qualify as Quant trading.

Moving further, it’s important to understand that the Quant piece can be independently applied to the various aspects of trading. In other words you can use Quantitative analysis to find an edge through back-testing, likewise you can access the risk of various outcomes, you can also use Quant for execution to determine optimal sizing at a given point, and so on.

You can call yourself a Quant, if you are using Math or Stats for any of these applications.

The exhibit below is excerpted from the book - Inside the Black Box: A Simple Guide to Quantitative and High Frequency Trading (Wiley Finance Book 885) eBook: Rishi K. Narang - (On a side note, its a must read for any aspiring Quant)

Page 17

What does NOT constitute Quant trading?

Mere use of numbers in your trading does not constitute Quant trading. For example you may use number to denote, Price, Volume, Time, Average Time or derivatives of price as Average Price etc. But that does not mean you are a Quant.

You may also use numerical data representing, Bid Price or Ask Price / Orderflow or any numerical variable for that matter. However esoteric the variable may be, it still does not mean anything, so long as no Math or Stat model has been used by you in arriving at it.

I am sorry that things have gotten to a point where I have to say this, but they have. Look at the text I recently received. I rest my case here.

Leading Constituents of NIFTY50 | My Counter-intuitive Findings

If you follow the blog you would have heard me say our NIFTY-50 index is pretty skewed from a weight-age standpoint, top 10 stocks account for close to 60% of the index, top 25 account for close to 80 and the balance 25 stocks account for just 25% of the index weight-age.

Intuition would tell us, so long as we follow the top 25 constituents i.e. (80% of Weight-age) we should be good. Good in the sense we should be able to predict short term (15 to 60 minutes) trends in the index.

To be frank I along with a few others spent several months in that top 25% rabbit hole, only to realize that the action more often than not begins in the bottom 25 stocks.

Here are some visualizations

Before we move to the visualization, please refer the Legends / Descriptors below

Legends / Descriptors for the NS Advance Relative Strength Indicator

As you see in the Legends we have two indicator panels below the NIFTY Fut price chart. The Top panel refers to the top 25 Stocks and the bottom panel refers to the Next 25 stocks.

Now let me take you though a few sample days when the Bottom 25 Stocks lead the top 25 and also the Index, though I have back-tested this phenomena, I am bound not reveal the specifics, but this is the idea and you can test it for yourself.

29th Aug’19 - Look at the Stocks above +1 SD of VWAP - They lead by close to 15 minutes

5th Sep’19 - Look at the Stocks Above VWAP line - They lead almost all through, even though stocks below -1 SD are fairly high on the top 25 Stocks.

12th Sep’19 - Look at the -1SD line crossing over the % of Stocks above VWAP line - Happened in the bottom 25 Stocks way before it did on the top 25

20th Sep - How can I forget this day - Look at the % of Stocks above 1SD line, again led the upper 25 by close to 20 minutes.

During the trading day, I keep an eye on the bottom 25 stocks and if I notice any divergence, I become cautious, as it could a portent of doom esp., if I am on the wrong side of the trade. Time permitting I also tell my mentees on the slack group.


Something similar happened on the 20th of Sep’19, a day which would be etched in my memory, not because I was positioned on the right side of the trend, but because it was a classic demonstration of almost everything that Mandelbrot says in his book Misbehavior of Markets.

Back to the charts, this phenomena of bottom 25 stocks leading can also be observed through a sectoral index lens, since each of these segments top 25 vs next 25 have a sectoral skew within it, more about it next time.

Before I close -The usual disclaimer applies, don’t use this factor in isolation, there are other factors that I consider before initiating a trade, the purpose of this post is only to illustrate the informational value in tracking the bottom 25 stocks of the NIFTY50 index. About the 20th Sep’19 trade, no I am not saying I predicted it, all that I am saying is the same signal helped me capture a good part of the move.

Trading Indexes vs. Trading Constituent Stocks | What's good for the goose is NOT good for the gander

Before I delve into this topic, let’s think in a more abstract sense.

  1. Is Crowd behavior the same as Individual behavior?

  2. Does the average income of a nation give you a sense of your friend’s income?

  3. Why do psychologists study Social Psychology separately compared to Individual Psychology?

  4. Can an Individual influence the crowd?

Hope you get the drift?

One of the biggest mistakes which traders make is to look at an Index Futures / Options product as if it were a Stock. This assumption makes them sure the same set of measures or indicators to measure both.

For instance a Pullback in an Index is not caused by selling or buying of the index futures product at that point of time, whereas a pullback in a Stock price or its derivative happens due to buying and selling pressure in it.

Lets take a look.

NIFTY FUT 30th Aug’19

If you look at the image above, its you will see we had a V shaped day, but what you need to look at it is how the constituent stocks behaved both during the down move and the up move. If you notice the down move was caused by almost all Sectors as highlighted in the image + Reliance however HDFCBank and IT Stocks were quite resilient.

In the second half of the day, HDFCBank lead the up move, with other joining however IT Stocks remained flat.

Now, what is it that we can learn from this.

  1. Indexes are essentially influenced by Stocks or Sectoral Swings, Sectorals are Stocks belonging to a sector within the index constituents. (I will do a detailed post on the Sectoral Studies later next week) - Hence if you are trading the index you better keep an eye on the Sectorals as they can be leading indicators depending on their respective index weightage.

  2. Individual Stocks have their own drivers, depending on news and other sentiments.- Microstructure tools like Orderflow and Orderbook data are better suited for stocks than Indexes.

  3. This is also the reason why Indexes are more mean reverting than Individual stocks.

So to sum it up, we need to understand the difference between Crowd Behavior (Index) and Individual Behavior (Stocks) and know which individuals have the power (Stock Weightage) to influence the crowd and which ones don’t

Opening Spike | NIFTY Weekly OTM Strike Based Strategy | Performance

Those of you in the trading room would already know the changes that we have made to the existing Opening Spike trade by using OTMs instead of ITMs.

The Thesis - This strategy is about capturing the opening volatility, its a direction agnostic strategy and we aim to capture statistically optimal moves, with a fixed target and risk. We use NIFTY Weekly OTM Strikes to execute this strategy.

Here is the performance of the approach for the current month (As executed live in the Trading Room)

So what’s so great about it?

Well, several things.

  1. Low Capital Requirement - Typically the OTM Premiums that we use are in the range of Rs. 20 to 25. We keep 4x of which as the allocated capital for this strategy.

  2. Low Transaction Costs - Low premiums has a direct impact on STT and as you can see the strategy itself is designed to take very few trades. So on all counts low costs. *Example of a contract note below to give you a sense.

  3. High Win Rate - Yes this approach has a very high win rate, we have statistically tested it.

So whats the catch?

Like all good things in life, this one comes with a few catches,

  1. Time Dependent - This trade occurs at a specific time window, you need to be there to capture it.

  2. Execution Skills - Yes, this one is the most challenging one, being a scalper its easy for me to execute this, but if you are new there could be a learning curve of close to a month at least to get this right.

* Contract Note Example / Broker SAS Online


  • Don’t attempt this by yourself. Unless you know what you are doing.

  • It looks simple but its not easy.

  • We factor in several variables to take this trade, its not a Price only thing.

  • Past performance is no guarantee of future results!

Journaling | Are you fooling yourself or is there a better way to do it?

There is no dearth of resources on journaling and its benefits As with most of the things which are hailed as revolutionary and life altering, as I put my skeptic’s hat on, I see some major issues.

First things first, what is Journaling, essentially Journaling in any context, trading or otherwise is a Reflective practice, where you think about the past, a set of past events, the context in which that event happened, and your behavior in that context, and then jot it down. You may also jot down what you want to continue doing and what you want to change about your behavior if such a context occurs in future. Fair enough.

Now what could an issue with such a process?

Ever heard of this thing called “Hindsight Bias” - Here is the wikipedia definition of it.

Hindsight bias, also known as the knew-it-all-along phenomenon or creeping determinism,refers to the common tendency for people to perceive events that have already occurred as having been more predictable than they actually were before the events took place.As a result, people often believe, after an event has occurred, that they would have predicted, or perhaps even would have known with a high degree of certainty, what the outcome of the event would have been, before the event occurred. Hindsight bias may cause distortions of our memories of what we knew and/or believed before an event occurred, and is a significant source of overconfidence regarding our ability to predict the outcomes of future events.

What if your recollection of the past itself was a bit coloured? What if you jot down something as, if A and B happen - I will do C - and then when A and B happen you could not recognize it as it’s not possible to be sure its A and B and hence you could not follow your self made rule of following C.

Specifically talking in the context of Trading, this is the biggest issue of Journaling along of eyeballing charts is, it’s so damn easy to spot that cross-over, that divergence when it’s in hindsight, and hence equally easy to create rules based on what you see on static charts. Only to not know when to follow the rules that you created for yourself, as you cannot recognize the context which you could easily do in hindsight.

Does this sound familiar?

So what’s the way out?

The answer my friend is blowin in the wind. Sorry for that one, the song was playing in the background and I went with it.

So yes, after much thinking I realised, there is no other way to it than to put in in numbers, in other words, you need to define what A means and what B means, and then look for conditional probabilities of the event, based on which you can decide if the bets are worth taking and set a limit to the losses.

Going back to the old example - Once you spot A and B (Not in an arbitrary way, but more in a measurable way) , you should now know the probability of C happening - And create a set of rules to both the situations, ie if C happens I will do X and C does not happen I will do Y. You can further dig into the stats to optimize these numbers and modify the rules as you go on.

A meaningful way of journaling would be, to write your observations based on the historical probabilities as references.

And as far as behavioral factors go - Ask yourself, what was the context - right before you took that so called “Bad” decision

  1. Why was that decision Bad? Just because you lost? What if you take that bad decision everyday, would it statistically work in your favour? If yes then it’s not a bad decision.

  2. Was it bad because you broke a rule? A rule which would statistically keep you safe? In that case - ask yourself about the context in which you “gave in” - Was there some other external influence on you at that time? In other words go one level deeper in terms of what made you do what you did. Write that down in the journal.

  3. Always create your rules which followed in any given context would keep you on the right side of your books? It’s almost impossible as humans to have too many if-then-else loops running in our minds.

  4. Think of “triggers” which lead to a “rule breaking” behaviour. For instance, in my case it was for a long time, a variant of revenge trading, I may have made money in the morning, lost it in mid day, and would like to end my day green again. So in my case losing my morning gains was the trigger.

And yes, even after doing all this Hindsight Bias may still creep in, its almost a part of our DNA, so long as you are conscious you are good, and if you do break a rule, forgive yourself, there is always another day and another trade to take - trading after all is one of the most difficult ways of making easy money.


Thoughts on | Probability Distribution based Position Sizing, Entries and Exits

With the long weekend ahead of us, here in India, I thought of spending a good amount of that time writing, so I went through my notebook for ideas to blog about and this one stood right out.

So here it is, this is how I go about marrying NIFTY stats with my sizing, entries, exits and risk management.

I typically structure the markets (^NIFTY)  in four parts, ie from a time of the day perspective and the probability of range formation in that time window.

For example - I look at the average range formation / time. In other words the average of each of the columns that you see below.

That gives you a sense of the probable range in terms of Points.

Meaning if the average range is 100, 26 happens in the first minute and 26 in the next hour and so on.

So as you can see the 2nd and the last time segments are the ones which offer the maximum probability of range formation. No sense in betting on the other time segments when you know, there is no statistical edge in there.

This becomes your first filter or framework on which you will now build the Position Sizing logic.

Position Sizing

Start with defining what would constitute 100% Size. This 100% should be such that, even if you size down to say 25% you should still be able to follow your scale out plan.

Example - For NIFTY since the lot size is 75 - and assuming you will do scale out in three parts t1, t2 and t3 with 50:25:25 % ratio (We will come to scale outs later in blog). You will need to trade with a minimum of 16 lots. So that even if you do 25% of your full size you will still be able to scale out with the defined ratio.

Risk Per Trade - We will maintain a risk per trade of 1% or 10 points or Rs. Assuming we trade slight ITM calls/puts for trading with an average cost of Rs. 200 Per Contract. 1200 which is our full size would cost us Rs. 2,40,000. The recommended capital allocation for this would be 5x meaning you will need to have Rs. 12,00,000 in your account assuming there is no leverage available for long option trades. So even if your stop hits for a given trade you will lose Rs. 12000 which is 1% of your total allocated capital.

Entries - The logic of Entries is largely based on the following data

  1. What time segment did we get the entry signal?

  2. How much of the day’s range is already done?

  3. Are the internals supporting or confirming the move?

Based on these inputs we decide to go with anywhere between 25% to 100% of our defined sizing.

Exits - Scale outs offer the most optimal risk-reward ratio based on my backtests. To understand why scale-outs work best one needs to understand the idea of Probability Distribution.

Look at the image below, you will see range and next to it the probability of that range occurring in that time window. As the range extends (with Mean as the reference) you will see the the probability of further extension only reduces.

For Illustration Only!

As common sense would dictate, you need to scale out of your position as the probability of your targets’ being achieved starts reducing.

Likewise for entries, if you are entering a breakout trade and the probability of further extension in that time window is only say 30%, where is the edge there?

I hope this approach, based on simple market statistics. helps you in structuring your trade sizing, entries and exits.

Again, do remember that markets are dynamic and these distributions have a seasonality to them, so you need to keep an eye on the changing market structure and trade accordingly.

Looking through the Index moves | Analyzing Weightage based Segments

One of the perennial questions that’s in my mind as an Index trader is “What caused that move?” - We at NiftyScalper have been down several rabbit holes to find the answer, hopefully there is some light at the end of this “Market Internals” tunnel.

One of the things we are experimenting at the moment is looking at the index in segments.

Below are the three segments that you can see.

Segment 1 - HeavyWeights - In Red - 60% Weightage

Segment 2 - Mids - In Yellow - 22 % Weightage

Segment 3 - Bottoms - In Blue - 18% Weightage

Creating these segments helps us see the Index in a different light. One of the initial beliefs which we had about constituent stocks is that the bottoms which constitute 18% of weightage may not have much predictive value for the index, but we are learning something new about that belief, which I would share further down in this post.

Lets go back to the initial question that we started with “What caused this move?” - When I ask that question do note that I am usually looking at those Short time frame swings or trends which last anywhere between 45 mins to an hour.

To answer that question we look at the Average % Change of Prices of Constituents stocks in the above three segments of the Index. Do note, the Red line is the HeavyWeights, Yellow the Mids and Blue the Bottoms.

Image 1

To make it distinct visually I have drawn these boxes. Look at the first box in Image 1. That upward spike and the up move thereafter, it was the heavyweights which caused it, also notice the other two segments in the same time window, they are clearly diverging.

If you ask “Who caused that Up move?” - The answer clearly is the “HeavyWeights”. And if you ask who caused that down move - The answer clearly is the - “Mids” and the “Bottoms”. You will notice almost all through the day that was the pattern, the Heavyweights were trying to puss the index up and the Mids and Bottoms were pulling it down. Now lets look at another day.

Image 2

This is a sort of range bound day with a mild downward bias, as you can see the HeavyWeights were flat and a bit positive too holding up above the Zero line, where as it was the Minds and the Bottoms who were pulling in the index down.

What I have learnt so far about Index moves is this

1) Constituent Stocks oscillate between the two states of “Convergence” and “Divergence”.

2) The state of “Divergence” can also cause a directional move depending on the strength of the segments and the degree of the move in terms of Price change.

3) We get to see more stronger moves when there is “Convergence”. For instance we may have had an upward trend in the Index in the Morning session, by mid day you may see a Divergence in the segments, for instance say - the Minds and the bottoms are pulling the index down - now there are two possibilities either they (Minds and the Bottoms) converge with the Heavyweights and move up or the Heavyweights converge with the Mids and the Bottoms and move down.

These are pretty much the things which happen in the Index all through the day.

Now the question would be - How does this help in Trading?

1) Looking for developing divergences helps in identifying the beginning or an end of a move. Divergences can start with the Bottoms as well, and in some times the other two segments can catch up.

2) Knowing which segment is in control also helps in making an assessment of the possible degree of the move.

3) Past patterns can be used to predict the future. Machine learning and data science can be of use here.

Hope you found this useful!.

Segmented Cumulative UpVol-DownVol | Making of Trend Days

As traders we are always fascinated by trend days, for novices it a great day, for the ones who trade reversions to the mean, its dreadful.

In this post we look at what happens in the underlying stocks on Trend Days.

The indicator that we have chosen to analyse trend days is a % Cumulative Upvol-Downvol for a Segment of Stocks. There are three segments of stocks that I have taken.

Segment 1 - Top 10 Stocks By Weightage - Constituting (60%) - Solid/Red/Green - Top

Segment 2 - Next 15 Stocks By Weightage - Constituting (20%) - Dashed/Red/Green - Mid

Segment 3 - Next 25 Stocks By Weightage - Constituting (20%) - Solid Yellow - Bottom

So what do you see here?

a) You need the Top Segment to be trending.

b) If the Mid segment goes along with the Top good.

c) Bottom Segment unless makes a massive impact , does not really matter.

Figure 1 - 25th Feb’19

Figure 2 - 11th Mar’19

Figure - 3 - 5th Mar’19

Does it matter which Trading Room you join?

Choosing your Trading Room can be as exacting as Choosing your life partner

Are you part of a Trading Room? Or looking at which one to go with but not too confident where to put your money? Well having run a Trading Room and being part of a few well known ones, I’ve come to understand that there are a few things you need to consider before you have your pick.. As they say Birds of a feather flock together, so here’s how to find your nest..going with the bird metaphor!

Your Trading Worldview - What beliefs do you hold dear to you and what are you willing to let go? Gann numbers or Elliot Wave; Market profile/Orderflow or Market Internals? Quant based or Qual based trading...you see where i’m going with this. Seldom have i come across Trading rooms serving all and being good at it. See what aligns with your worldview before joining a Room


Learning Environment - Telling vs. Learning. Some Trading rooms ‘Tell’ you what trades to take and when, so you are more an implementer of their trading decisions and there are other Trading Rooms which may focus on working through a process that is consistently called out, so you are not just executing trades but also understand the logic behind taking a particular trade. One way to know if it is the later, is to look for consistency in the trading process/rules being followed. Do you understand why a trade was taken or cancelled. How do they rationalize losses? Do they provide reasons?

Metrics & Tracking - What gets measured gets done. Any room that is brave enough to put out their performance chart, every day, consistently , ‘Respect’. Day trading is like any other business, you need to run an end of the day tally, else how would you know which days you do better? whether there is a correlation between your green days and other factors like range etc? Any room which shies away from it , is not being true to the game.

Integrity - Claims vs. Reality. Timing is key here. Tall claims based on Hindsight Analysis are for newbies and seasoned Trading Rooms would stay clear of it and instead would be able to show real time decisions taken in the Room. Bet on that!

Look before you leap - Ask for a trial - any Room that is confident of giving you one, darn sure they know their business. It’s that clear.

Trading Instruments - Jack of all; Master of None. How does that sound? I will be a little hesitant to put my money there. Prefer to work with specialists and experts, in one or two areas . Know your instruments and chose your Trading Room partner. Side note: Did you know : In an Indian context trading Futures makes less sense compared to Options esp. intraday. Just saying, time you get that nuanced in understanding this game.

Trade Setups - What's your Risk appetite?What RIsk Reward ratio are you comfortable with?40 point SL ?30 point SL?10 point SL? And add to that the holding period, and the scene changes completely: Intraday vs Positional or Swing, both approaches have very different risk levels and risk management approaches. Choose a Room that aligns with your Risk appetite ratio

Charting & Live Screencast - This is a kicker. All trading rooms boast of proprietary indicators. Guilty as charged. But hey, there is a method to the madness. Does the Room take the effort to explain these indicator and point out why a certain decision was taken , have user manuals explaining these indicators and finally do they have enough back tested data in support of these indicators..then you have a winner.

Trust this helps you sieve through the noise and pick your Trading Partner. it’s not that you are going to be wedded for life so go ahead and walk down the aisle. Happy Trading.

Kavitha K7 & Sandeep Rao

Putting Losses in Perspective - Structuring a Trading Plan to include the Edge

In the previous post we talked about what an edge is and how do we know if we have one?

If you are beyond that, it means you have crossed a big milestone, as most (90%) of people that I know, can't get past that.

But knowing about an edge is hardly sufficient to make it work. You also need to know how and when to execute trades in the context of that edge. We will not get much into all aspects of execution today, but focus more on the “Rules” for execution i.e the Trading Plan

Think of the following questions before you create a trade plan

  1. What are the prerequisites for you to enter the trade - Meaning what are the the confirmatory elements that you need. It could be defined in terms of factors like - Price Range, Time of the Day, volume levels etc. any measurable variable

  2. Would you wait for a confirmation on all variables or there is a prioritization among them, or weightage.

  3. Would you enter all at once or would you scale in / pyramid into the position?

    1. How much would go in the first tranche and the subsequent?

So you put the trade - and next

  1. What would you do if

    1. You don't get a fill

    2. You get a partial fill

  2. Where would you Stop Loss be?

    1. Is it going to be dynamic or static?

  3. Are you going to Exit in full size or you would scale out in parts?

    1. How would you determine the scale out ratio?

    2. What if the price reaches 90% to your target and does not move beyond? Would you wait for up your Stop loss or Cover?

    3. What would be the buffer/variance where you will cover your trade even if it does not hit the target precisely.

      1. On what basis would you cover or hold?

Having answers for all these questions, answers informed by data i.e. - ought to be your next milestone

Putting Losses in Perspective - Do you have an Edge?

One of the fundamental reasons for losses in trading can be traced to lack of an “Edge”. But then you would ask me what is an Edge?

To me a trading edge is -

An ability to isolate a condition or a set of conditions among a market variable or a set of market variables - that has a non random way to evolve over a specific period of time.

I remember reading somewhere, but I cannot place it where - it said - “If you can’t explain your trading edge, you don’t have one” - Let me take it to the next level

If you do not know the statistical a) probability of the set of (prerequisite) condition/s that need to occur b) the probability distribution of the outcomes once the conditions (a) occur.

If you cannot articulate both then in my world you do not have an edge.

It’s quite possible that you are a veteran and even though you cannot articulate your edge, you have internalized it over a long period of time. But that according to me is a long winded route and I would personally prefer to be in the know of my edge.

So coming back to losses, the reason we need to be able to articulate our edge is - in the event of a loss, we need to know if its a part of our larger probabilistic framework or is it something which is beyond that. We need some objective reference. For example if you have a loss streak of 5 days, you need to know its statistically “normal” in your trading system or is it an anomaly.

In other words, your understanding of the variables of your edge helps you put your trading outcomes in a measurable context.

In the same breadth, it also helps us understand if the market regime itself is changing, and helps us adapt better.

So the next time you make a loss you know who to catch first?

Putting Losses in Perspective | Introduction

“I just want to breakeven”

“I just need to recover my last loss”

“I just need one move in my direction and I will be in profit”

“Let me widen my stop loss I’m sure the price will turn in my favor”

How about these lines?

“I should have stuck to my strategy/my rules”

“I should to have got out earlier with little losses and instead I stuck around”

“I should have closed my trades than choosing to go positional…big mistake”

Sounds familiar? The ongoing chatter in a loss making mind. Sometimes it’s there during the trade and more often, after a loss making day!

As much as we credit ourselves as rational beings capable of making sound decisions, literature proves otherwise. We are just a Rider on the Elephant, and if and when there is a disagreement the Elephant usually wins.

But then in the real world, sometimes it's not just the rider and the elephant, it could also be the terrain, the skills of the rider, or the elephant itself, and a whole lot of other factors.

This is an introductory post of our month long exploration on dealing with losses, we will look at the genesis of losses and what is it that we can do manage, minimize and make peace with it.

Losses in trading can happen due to a lot of reasons, sometimes they can be point one specific focus area like emotions etc? but most often they are combinatorial. It could be emotions plus an infra issue. or execution plus a trading strategy issue.

To look at losses, and to be really at peace with it, you need to isolate the causes, you can make peace with your losses only and only if you are damn sure that it’s a part of your system, and adheres to your trading system’s win/loss rate and size.

Its like this, you have a headache, and you wonder why do I have this headache - on a spectrum of causes, on one end it could be dehydration and on the other extreme it could be a brain tumor. Now for you to be at peace and ignore the headache you need to be damn sure it’s only dehydration and not a malignant brain tumor. (Sorry if that sounds morbid, losses can be equally bad)

Dehydration in trading will be a “loss that is part of the trading plan” and Brain tumor will be everything else.

In the coming weeks Kavitha and I will spend some time on strategies, methods and models to manage losses both behaviorally and financially.

Through the Looking-Glass, & what NiftyScalper found there | Market Internals - Part 3

This is the third and last post in this series,

Part 1 - Here

Part 2 - Here

**Read about what RSI is over here

In this post we will look at the good old RSI Indicator which has been re-purposed to be used as, both a trend indicator and an oscillator.

The math - We took the top 25 stocks (by weight-age) of NIFTY 50 and Averaged their RSI Value. So we have a Average RSI of the top 25 stocks vs. RSI of NIFTYFUT or RSI of 50 Stocks. Since the 25 stocks have close to 80% weight-age the cross over of the Average RSI and NIFTY RSI acts as a trend Indicator.

Notice the RED colored (NIFTYFUT RSI) Crossing over the Yellow Dotted line of (Average RSI).

We also back-tested for ideal Oversold and Overbought levels - you will see it marked with Blue colored markers in the images below. Typically a RSI Absolute Difference of 10 - 12 i.e (NIFTY RSI - Average RSI)

So here you have a Market Internal based Trend Indicator + Oscillator all built into one since indicator.

There are several other setups for trading pullbacks using this indicator, but thats for another day..

Please do not ask for the RSI Period settings on this one, but its no rocket science. Also, at NiftyScapler we don’t use any of these three indicators in Isolation.

Image 1

Image 2

Educational Explainers - Lead Lag Effect - NIFTY

Last week we looked at what Indexes are (Over here).

This week we are investigating the lead-lag relationship between Spot price and Future prices in NIFTY.

So what does academic research and years of observing the market tell us? The verdict is out..

Allegory of the Cave, Order-flow and Price Discovery

There is this interesting story called “Allegory of the Cave” by Plato.

The story in a way describes what happens to people when they are blinded by a context and fail to see the world outside of it.

I was reminded of it as I saw my twitter feed yesterday.

Instance one below

Next one here

Both the posts allude to the idea that

a) We spotted big buying at that level thanks to Orderflow.

b) Big buying led to the turn in the price.

Point b) is the key. One needs to get an handle on that, and one needs to ask fundamental questions there.

So the question to ask is -

Did the buying happen because the price turned or the price turned because the buying happened?

Yes, that question sounds a lot like Socrates’s Euthyphro Dilemma.

But let me not deviate.

Back to the question.

“Did the buying happen because the price turned or the price turned because the buying happened?”

To answer this question we will turn to what the researches say,

The idea is to understand the location of “Price Discovery” - If price discover happens in the Futures, then we can say - Price turned because buying happened.

However, if the location of price discovery happens to be Spot/Cash market, then it’s the other way round - Buying happened because the price turned.

So what’s the case with NIFTY, where does Price Discovery happen in NIFTY - Spot or Futures ?

Read this post for the evidence - https://www.niftyscalper.com/blogs/2019/1/21/lead-lag-volatility-spillover-effects-some-evidence-from-academic-literature

Kavitha and I will talk about it in our upcoming Explainer tomorrow.

As I sign out - Don’t for heaven’s sake look at the shadows and imagine a non-existing world.

Lead-Lag / Volatility Spillover Effects | Some evidence from academic literature

One of the most fundamental concepts one needs to understand as an Index Trader is that of Lead-Lag effect. I have been reading through several academic papers to get a grasp of it. Here are some that stood out.

Notice the difference between NIFTY and the other markets, I rest my case here.

Price discovery on the S&P 500 index markets: An analysis of spot index, index futures, and SPDRs -  Quentin C.Chu, Wen-liang, Gideon Hsieh, YiumanTse

Price discovery in the German equity index derivatives markets - G. Geoffrey Booth , Raymond W. So , Yiuman Tse

Domestic and international information linkages between NSE Nifty spot and futures markets: an empirical study for India Sanjay Sehgal Mala Dutt

Announcement - Educational Explainers - Trading Indexes - NIFTY


Over the past few months, we received several emails asking us to explain the whole idea of “Market Internals”, and in our attempt to explain things we typically had to start with the basics.

This series is a conversation, where Kavitha is asking all the basic trading questions you would ask and my response to them is an attempt to help you ease into what it means to trade the markets.

We are calling it Explainers, as the word suggests we would get down to the brass tacks of why the Market Moves. Our attempt to explain would be evidence-based and we would avoid conjectures as far as possible.

In the initial few topics you would have access to, is a three part explainer on trading indexes in India.


While we have a set of topics we think will add value, to both absolute novices and developing traders, understand the nuances of trading indexes, do suggest other topics that you think NiftyScalper should add to the mix.

Happy trading!

Here’s the first one from the series - What is an Index and how do we trade them?

Through the Looking-Glass, & what NiftyScalper found there | Market Internals - Part 2

In the previous post here we looked at the NiftyScalper Advanced Relative Strength Indicator which is a Price based internals indicator, in this post we will look at the next piece of the puzzle ie Volume.

If you read about internals for the US Markets you will come across something called NYSE UpVol and NYSE DownVol, more about it here.

Unfortunately our indexes don’t broadcast this info. But what do you do when you need something badly and cant get it, you build it.

Yes, that’s what we did, we created our own NIFTY UpVol-DownVol indicator for the top 25 stocks.

Do note that, instead of a ratio we decided to look at the Net Volumes as we would also get a sense of liquidity/participation along with the direction.

CumValue - Cumulative UpValue-DownValue; CumVol - Cumulative UpVolume-DownVolume

As you can see in the above image, there is a massive net sell in the volumes of the constituent stocks, now follow the price action in the next 30 to 45 minutes. Lets move to the next idea.

Based on a suggestion from a fellow trader and friend Navdeep we came up with a variant of NIFTY UpVol-DownVol which we call NIFTY UpValue-DownValue, here we look at not just the volume but Value i.e Volume * Price. This helps us normalize for situation where the volumes could be skewed due to higher or lower face values of stock prices. It also helps us recognize situations where only a few key stocks try to pull the index up or drag it down.

Look at the image below

You an see there was buying that was initiated, perhaps in a few stocks (quite heavily) hence reflecting in the Up-Down Value but Up-Down Vol remains in the red. As you would imagine this was a narrow range day with a tug of war between a few heavy weights and rest of the index.

As I sign off, I must contend that I these Internals based Indicators have really saved me a lot of head and heartache. I am able to filter out contexts that I don’t want to trade, quite well.

Update: 16th Jan’19

I found a similar spike in the CumVol, this time on the upside as discussed in the first image. Notice the price action after that.

Trend Day - 15th Jan’19

Life as a Resource Allocation Problem | Year End Musings - Delivered late!

The missus and I were off to Bhutan this year end, and while I was there, I was receiving some calls to attend a trading conference. So there began a discussion on the value of attending conferences and my view on it.

My view is that trading or anything of value has to have a lot of nuance, which comes from years of experience and practice, and expert is an expert because he/she has developed that nuanced skill/intuition.

With that said, ask yourself as to what would you like to focus on, depending on were you are on your learning curve -

If you are a beginner - It would help immensely to find a mentor, and work with him/her to develop core skills, in other words try to be an Apprentice - Takes at least 8 to 10 Years

If you think you are at an Intermediate level - At this point, it would help to connect with more experts to understand what others are doing, and and build your skills by borrowing ideas and adapting them to your context, as Cal Newport says - this could be the Creative Active phase. - Beyond 8 to 10 years

If you think you are an expert - It would again help to engage with others in the space, to continuously learn and understand the space at a more macro level. This is at a point when you have reached Mastery - 15 + years of experience

Now the reason I called these things out is to help you contextualize - what would help you at a given point of time. I personally believe a lot of our adult life is a Resource Allocation Problem, the better we get at it, the better would be the outcomes.

We have these three fundamental resources which feed into one another - Time, Energy (Cognitive & Physical) and Money.

Money can help us buy Time a bit, but Energy determines how well we can use that Time.

Hence we need to ask ourselves where would you like to allocate your fundamental resources so as to achieve your goals.

You can use your time, money and energy to either attend a conference or perhaps buy a few books or may be fund a trading account. Which one these would help you get to your goals faster, and that depends on where you are on the learning curve.

Lastly think of it this way, if you have to choose a heart surgeon, which one of would you choose, the one who has spent 10,000 hours doing surgery or the one who has attended 100 conferences.

To flip the context - So which category of surgeon would you want to be?

Its the same with Trading.