The focus of this blog is Scalping and everything related to it. I do believe that excellence at Scalping or trading, and anything that is performance based, requires a holistic approach. Through this blog I would also wander (quite often) in the areas of Performance Psychology, Productivity and Health.
Here’s some news, I have joined Capitalmind and would be working on a Trend Following strategy for a few months now. I would also be writing extensively about Trend Following as a strategy on NIFTY Futures. Something similar to what you see here.
More importantly, the series of posts that I am doing would take a DIY approach to model building.
Here’s the first post in the series which is free to access.
https://www.capitalmind.in/2020/06/what-is-this-trend-following-thing-anyway/
So here it is, a lot of followers of the blog had been requesting me to come up with a trend following Long-Short Positional strategy, which could either be traded in isolation or as a compliment to a Long only Equity Portfolio.
For sometime now, I too was looking at strategies on a larger time frame, I decided to work on something that could be easy to execute, with minimal oversight and could offer a decent risk adjusted return.
Here are the results and the trades taken by the strategy, you can bookmark the page as it’s going to be updated as and when I take trades on the system.
Click here for the Updated Google Sheet
Later in another post I will explain various hedging strategies, i.e. if you would like to trade this strategy in isolation.
With an impending recession, I do expect VIX and Volatility to be on the higher side, the strategy has been designed to benefit from it.
I am afraid I cannot reveal the exact mechanics of the strategy, but its no rocket science. The data of the trades is out there for you to see and its very easy for you to re-engineer it with some effort.
Note - I am not a SEBI Registered Advisor and this is not a recommendation to trade.
With the advent of Weeklies, obviously selling or going short on Options makes a fair bit of sense if only know know how to manage risks.
One such strategy which works best when VIX doesn’t spike mid day, is an Intraday Short Strangle. The key here is to execute the trade at a point during the day when greater than 60% of the 20 day Average Intraday Range is already established at at that point of time, depending on where the market is, up or down, from point as a reference you can establish a Short Strangle around 20 day Average Intraday Range away from the high or low of the day.
For instance lets take today’s example on BankNifty, works better due to larger ranges.
The Rules -
Trade on current week series on all days except Thursday, on Thursday move to the next week’s series.
SL would be based on Average P&L, I keep 2x of Avg P&L (Do your back test or forward test to figure).
Strike Selection - Calculate Average Intraday Range for 20 Days. Then calculate StDev of that, take a value that is Mean + 2 StDev. For example today at 9:18 ish the Banknifty futures was around 18800, and I chose 21000 Ce and 17000 Pe.
So here is the Strangle chart and you can see how the linear the the move is. The first one is BANKNIFTY and the second one if of NIFTY, Ideally if you get an entry in the first 15 minutes of open, you get a good edge, or else you get stopped fairly early in the game.
The Second opportunity for entry is typically middle of the day when the Volatility expands. More about it in a later post.
16th April Strangle Chart - IB TWS
NIFTY 8600/9400 Strangle Chart 24th April - IB TWS
For long I wanted to code a Market Internals based signalling system for Scalping, just didn’t have time. Thanks to the lock-down, I spent some time on the system and brought it to life.
The system operates on a very simple logic,
If the # of stocks above (VWAP + 1 SD) (Standard Deviation) in the universe (NIFTY 50 or Top 25) is greater than the number of stocks below (VWAP - 1 SD) go long, if the reverse happens go short.
As you all know its more about getting your bias right, so that you don’t take some probabilistic-ally stupid trades.
So here is a snapshot.
If you see below you get two different colored arrows, light green and dark green, likewise for reds, Dark green has been configured for the the top 25 stocks, and light green for the balance, that way I get to know which segment of the index is turning bullish or bearish. as you can see in the image below, in the morning it was the lesser weightage stocks that turned bullish first and then the heavy weights joined, but the reverse was true when the index fell mid day.
8th April’20 - NIFTY Futs
Working on refining the system more, earlier I used to set it on 1min TF but that gave several false signals, so move to 3 minutes now, lets see how this works.
What a crazy three weeks it has been. Markets have shed closed to 30% as I write this. There is absolute mayhem in the world markets, future looks bleak. While this craziness unfolds, here are a few things that I recommend based on my experience with 2008 crash.
I am also writing this post for all those who have lost or are loosing considerable parts of their trading capital in these markets, either through trading or in their investing portfolios.
If you don’t know what’s happening stay off the tracks - In other words if you have not seen this kind of volatility and you don’t have systems and rules to structure your trade based on such volatility numbers, stay away. Always better to be flat than be in red. None of the systems designed for usual volatility regimes would work. We are in a totally different regime now, VIX at 62 is something totally different, I cannot emphasize this enough. I have friends and people who have written to me after having lost more than 60 to 70% of their trading capital.
If you are not well capitalized and trading as a novice these markets are not for you - Let me help you understand what is well capitalized. I personally do not recommend that you trade with any capital that is greater than 20% of your liquid net worth. Trading as a novice means, you do not have any back + forward tested systems, you are either trading on your hunch or on someone else’s hunch, which can be lethal.
Stay clear of Snake-oil vendors who promise 1% per day type returns or promise that they would help you recover your losses - They are leeches meant to suck blood out of people, that’s their business model. Please stay away from such promises. If you want to use their services just for fun please do, but do not put your money at risk.
If you have long term investments, either hedge them or move out - We are in all probability at the onset of a recession or a depression. Hopefully it stays within the median duration of a recession which is somewhere around 7 to 8 months. So there will be plenty of time for you to invest your capital. But holding on to your investments through a recession is a risky proposition. Unless you have surplus funds to deploy later.
Use the time to observe & learn and may be move on - There is absolutely nothing wrong is getting off the “trading mill” and re look at your approach to trading, your systems, and all that. May be time to leave trading all together and look at some new area. This may not be for you. Which is okay. You will have plenty of opportunities to invest and earn, if not trade.
Are there trading strategies that work in these environments? - Yes, there are but you cannot learn them overnight and deploy them the next day and recover all that you have lost. In other words, stay calm, learn slowly, trade very small, not to recover but to learn what works and what doesn’t
Lastly nothing is worth loosing you peace over - So don’t leverage, don’t take un-hedged overnight positions, the gaps in such volatile times can literally take you off trading for the rest of your life. As they say, its better to panic more than to panic less and lose it all.
Writing this post to document my challenges as I am trying to automate my trading strategies. As shared in the previous post, I am working on Automating some of my trading strategies, but I am also realizing how difficult it is to convert what was once a Hybrid trading strategy (Quant informed but Discretionary) to a fully Quantitative and Automated strategy.
The Good
Given almost a decade long screen time, it really helps you come up with hypothesis-es which form the basis for your trades and rules.
So in a way, as they say in the world of Optimization, you can define your “Optimization Space” better.
Automation efforts can have a fairly non linear pay off, your effort is towards a strategy, which is sort of fixed, but can be deployed for multiple people and allocation sizes (regulation permitting).
You get more time to focus on Strategy Design than on Execution.
The Bad
Its not easy to deal with itchy fingers, reminds me of the Ulysses and the Sirens story , I need someone to tie my hands for now. You invariable want to ‘finger’ the trade.
Its impossible to factor in that “hunch”, where you square off saying - I don’t think this is going anywhere.
Lower Returns - Yes, its quite possible that the returns from the same strategy may reduce due to its inability to factor in all the variables which you as a human would. I am not sure about this, will update as and when I get to know.
The Ugly
Thankfully no Ugly situations so far. Lets see. Fingers Crossed.
Which Strategy is being Automated?
I am testing my Bread and Butter Strategy that I call NIFTY - OD this strategy tries to capture a part of the Opening Range of NIFTY Futures. At the moment this is being implemented and tested on Futures, later will move it to Options for better cost efficiency.
Apologies for the long break from blogging, and sad to say that moving forward the frequency of blogging will be low, the reasons for which are shared below. Here is/are a few of my reflections on 2019 and my plans as I look forward to 2020
What I learnt in 2019
Trading wise, it was an average year, nothing exceptional, however, with close to 5 years in trading and increasing capital base, my ability to size bigger on the same intraday time frame was a concern.
Diversification across time-frames in trading can help in smoothing out the P&L curve.
Diversification is also necessary as your capital base increases.
% of Snake oil sellers in Trading is way more than what I thought. So learning to spot one can in itself be a major edge in trading.
If you are after big money, and have serious intentions to make a business out of it, look at a scale-able business model, there are limits to how much you can grow your own money. Unless of course you are a billionaire yourself, then your concern should be to diversify your investments to achieve a optimal risk-adjusted return. But then if you are a billionaire you would not be reading this.
Design Trading strategies and systems, with consistent but a moderate alpha in mind.
Look for structural edges, for example “Theta decay” in Options is a structural edge, meaning its largely independent of other factors.
Avoid people who sell one set of Indicators/Indicator based strategies like plague. That will save you a lot of time and time is money.
Social media can be a great place to connect with some great minds, but its your sizing skills that matter, the ratio of good to bad is close to 1:1000. Blindly block people who tweet motivational and inspirational quotes, its akin to porn, gives you a delusional high. A lot of people who actually are subject matter experts wont have time to tweet, so they are not going to clutter your feed.
I lost my mother this year, and that made me realize the importance of taking care of one’s health, seeking medical attention on time, and thinking fundamentally about what is it that you want to do to be remembered by others when you are gone, and its absolutely fair to ask the question - How does it matter if I am remembered or not? Its personal at the end of the day.
Time flies and as you get older it flies faster. 2020 is there and we are almost 2 weeks into it. Anyways.
On the trading front this would be a year of diversification, on both product and time frames. I intend to trade Stocks as well in Short Time-frames and Options on Longer time frames.
I would also be testing and trading variants of the traditional StatArb and Relative Value Arb. strategies.
Automation is another major area of focus, meaning I would work on making all my strategies fully automated. This is the reason I expect to be more time constrained this year than earlier. That would also mean, a restriction on the intake for my mentoring program.
I would also be cutting down on Social Media interaction and time, so expect to see much lesser tweets, not that I am big on it.
Moderate focus on Health, again its a matter of time and priority, would be focusing more on function than form.
Thanks again for your time and reading about what I had to say. Will keep you all posted as I move forward on this journey.
The regular readers of the blog must be wondering as to why am I writing about this when I myself don’t use any of it. Well the reason is, I get at least 2 to 3 emails a week asking for this, so I thought may be writing a blog post about it would help me manage my inbox better. So here it is. Please read the disclaimer before you move ahead.
There are three elements to charting , 1-Data Feed, 2-Charting Software, 3-Indicators, we will discuss all the three in this post. Lets first look at how do these charts look.
Market Profile Charts
They look like this image below
Screen Capture from Fin-Alg Website
This post is only about how to get these charts and not about its interpretation. So I will stick to the intent there.
These TPO (Time Price Opportunities) or Market Profile charts do not need tick data, meaning they do not need information about volume executed at each bid and ask price point, they can work with normal price volume data, and hence its easy to implement.
Order-Flow Charts
The next thing that you are looking for is Order-flow Charts or Footprint Charts. Remember conceptually there is no relationship between both the order-flow and the Market Profile charts. You can choose to trade purely based on Market Profile or purely based on Order-flow.
The Order-flow or Footprint charts look like this - they need tick data i.e. In NinjaTrader there is an option called “Tick Replay” which need to be enabled to get these charts working.
Screen Capture from Fin-Alg
To get the above charts working for yourself you essentially you need three things, a data feed, a charting application and some Indicators.
Data Feeds - Data feed providers take data from the exchange and provide it to you through an adapter, specifically for the charting platform that you are using. For example for Market Profile you can use either Amibroker or Ninjatrader (There are others but I do not have first hand experience with them, hence not recommending) - Amibroker is paid or licensed and NinjaTrader (NT) has both paid and a free version to use.
So you have the following options for your data feed.
http://viratechindia.com/ - They are the official providers of the E-Signal data feed. Expensive for retail traders. Call them for pricing.
https://www.truedata.in/ - They are the best in terms of quality and price for data, I use them not for market profile or order-flow, but for my own proprietary indicators. I endorse them for their value and high level of customer centricity.
https://globaldatafeeds.in - They are the next best option after True Data, personally I have found some issues with the quality of their price data, but that may be just me.
https://www.ticanalytics.com - These folks are newer compared to others, I really do not have any first hand experience with them. No harm in trying though.
Remember they all provide only L1 Data, which is data available post trade execution. They do not provide L2 is Market Depth / Order Book data.
Ok with Data feed thing, sorted, you can now move on to the next thing ie the Charting platform.
Charting Platforms - Charting platforms matter as much as the data feeds themselves, because at the end of the day the platform has to process the data that comes into it from the data feed. I will stick to the two major platforms - As stated earlier I recommend only the following two charting platforms as long as L1 data is concerned.
https://www.amibroker.com/ - This is a very powerful platform for both charting and back-testing. If you are keen on using Order-flow charts may be they are not the best, but for anything else, including Market Profile.
https://ninjatrader.com - This is a very powerful platform in terms of its ability to process tick data. If you are looking at Order-flow charts this is your best option.
https://www.linnsoft.com/ - Investor RT as they are called is another high quality platform in terms of its ability to process tick data and also to back-test. May turn out to be expensive compared to the other two options. They have their own Indicators for Market Profile and Order-flow which you would have to buy separately. This works with E-Signal for sure, don’t know about other data feed providers.
Date feed. Charting platform done, now we need the indicators.
Indicator Providers - There are several indicator providers for both Market Profile and Order-flow Charts you would essentially buy them to use it on your charting platform.
http://fin-alg.com/products.html - These folks have some of the best order-flow and Market Profile indicators. Only for NT.
http://www.ranchodinero.com/ - This is your next option, but a lot of traders I know have not liked their Order-flow Indicators. Market Profile indicators yes.
https://www.belltpo.com/ - We have an Indian vendor as well. They too have almost all the features of what others offer. I do not have first hand experience with them.
There used to be another vendor by the name Market Delta wo were the pioneers here, but guess what they have filed for bankruptcy.
Remember its recommended that you have at least a 2k resolution monitor or more, 4k is always better to view the orderflow charts well. Also do remember that it takes some time to getting used to, you would have to play around with the settings to get to see what you want to see.
Lastly there are also players like Vtrender in India who offer a live broadcast (Screen Share) of these charts based on their own proprietary settings, they use Investor RT and Esignal (I guess so), I am not sure you can directly contact them. You do not get to play with the time frames or the settings. Nor can you choose the instruments that you want to chart.
Hope this post answers your questions about Order-flow and Market Profile charting.
If you have any further questions fee free to write to me or comment below.
All the best with your Trading!
For the first time close to 15 odd people asked me to review a book. Something that has never happened to me before. Seems the author and the publisher of the book have done a good job of promoting the book. Nevertheless it was an interesting read, not particularly insightful for someone who has already done his bit of research about Simmons and Medallion and their likes.
However, I would still call it a recommended read for anyone interested in trading. The book does a good job of emphasizing the role of short-term trading strategies in making Medallion what it is.
~End~
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.
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.
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.
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.
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.
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,
Time Dependent - This trade occurs at a specific time window, you need to be there to capture it.
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
Warning!
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!
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
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.
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.
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.
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.
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
What time segment did we get the entry signal?
How much of the day’s range is already done?
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.
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!.
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
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
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
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
Would you wait for a confirmation on all variables or there is a prioritization among them, or weightage.
Would you enter all at once or would you scale in / pyramid into the position?
How much would go in the first tranche and the subsequent?
So you put the trade - and next
What would you do if
You don't get a fill
You get a partial fill
Where would you Stop Loss be?
Is it going to be dynamic or static?
Are you going to Exit in full size or you would scale out in parts?
How would you determine the scale out ratio?
What if the price reaches 90% to your target and does not move beyond? Would you wait for up your Stop loss or Cover?
What would be the buffer/variance where you will cover your trade even if it does not hit the target precisely.
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
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?
“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.
