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!.

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?

Finding 'edge' through Data Curation

When we talk of ‘edge’ in trading it essentially means, what is it different that you or your system has which would lead to an ‘alpha’ in terms of returns. One way to extend that question is to ask ourselves, as to what are the sources of that edge?

To me having a more deeper and nuanced understanding of the contexts and setups that I trade, exponentially adds to my edge. To get a better sense of my contexts, one of the practices that has massively helped me in my trading, is curating setup specific data. This is a lot of work, let me tell you. Sometimes it’s very difficult to train the computer to do what we humans can do intuitively, which means a lot of it is manual labor.

Let me try to give you a sense of what I mean, if you follow my blog you would know that, these are the three setups that I trade.

NIFTY - Scalping Set-up - 01 - Opening Spikes & Opening Drive

NIFTY - Scalping Set-up - 02 - Mid-Day Mean Reversion

NIFTY - Scalping Set-up - 03 - Afternoon Range Extension

Now each of these setups have their nuances and details, like

a) At what time did the entry get signaled? Is that time range bound? Is there a seasonal skew to it?

b) Range breakouts on VIX? Time and Amplitude.

c) What is the average size of the pullbacks that in the setups you trade?

d) What is the ideal holding time for your some of your setups, based on the length of the trends?

A lot of these computations are possible only if you have specific data. Therefore, this is a practice that we follow in-house and for our clients - i.e. to capture such data so as to run tests on it.

Here is a mini snapshot of the data. (Disclaimer : The snapshot may make no sense whatsoever without context)

This practice when followed over long periods of time can give you a gold mine of data, which (I believe) can add to your trading expectancy.

The Dark Side of Being a Full-time Retail Trader

Most aspiring traders that I have met, seem to have a few things in common

  • They want to be independent i.e not to work for someone
  • They also want independence in terms of their time, they perhaps want to spend time doing several things and not just trading
  • They want to make some reasonably good amount of money by investing around a year or two worth of time

These are the sort of expectations that aspiring traders usually have. And as they say, reality is usually quite different from what we expect it to be. So let’s look at the other side, the reality, the darker side i.e.

  • The other side of Independence is responsibility – responsibility to succeed at something by oneself, all by oneself – the impact of this on one’s self-worth can be massive, much more than one can even imagine – Especially if you’ve had considerable success or acceptance in your previous career, the impact could be even more.
  • The other side of freedom to use one’s time could be either indifference or obsession, both the extremes won’t help usually, obsession is a shade better than indifference though
  • Long streaks of losses can psychologically break the strongest of the people, which can have further ramifications, from depression to suicide, yes I am serious.

While all that I described above could be two extremes and the reality would be somewhere in the middle, but I guess what matters is

a) Getting a better sense of reality before diving into this business, yes I call this a business because, like any business, this too requires you to risk your time and money.

b) Developing a plan which includes the possibility of a fairly long learning curve 

c) Viewing this as one of the ventures in your entrepreneurial journey

d) Viewing trading as a performance sport – which would mean hours and years of practice and focused effort and an understanding that you need to be at the top of your game and like anything which is performance oriented very few can be.

e) Viewing the effort towards the goal not just in a linear sense, but also in another sense, be open to the idea of landing on something else altogether, in a serendipitous sense, which could alter the course, perhaps all for your good.

f) Finding like minded people to work with, not falling into the lonewolf trap, there are limits to what one can do by oneself

So with all this said, you can imagine how your everyday life as a trader is going to be. In all probability, you may end up being unhappy, and fairly stressed more number of days than you ever imagined. Depending on your general constitution, it may also affect your health. Depending on the quality of your relationships and life context that too may suffer. All this happens not just in trading, this is the truth for any entrepreneurial venture.

Even after being aware of all this, it’s still different when it really hits you. Because in the beginning, you tend to think “maybe it may work out differently for me” and then it doesn't, you may delude yourself for some time but then, sooner or later it does it hit you. And when it does, you end up asking yourself questions like – Till when do I be in this venture? Should I just quit and take up something else?

Valid questions with no simple answers.

As clichéd as it may sound – as they say - Nothing great ever was that easy.  


NIFTY - Scalping Set-up - 02 - Mid-Day Mean Reversion

This is in continuation with the scalping set-ups series. 

The first one being (

In this post we will look at the next most frequently occurring set-up (Close to 85 % of days). In the previous post we looked at Opening Spikes and Opening Drive, now this setup is the third play of the day.

1. What determines entry?

There are two key factors to consider when entering this trade

a) Range - Its recommended that you enter the trade once we cross the mean high low range for the pre europe open time segment. For instance this week the mean morning range has been 62.88 SD being 11.5.

b) Time Segment - Mean is again 11:52 (Hrs) SD being 44 minutes. So its good to attempt this play post 11:00 pm.  

 2. What is the probable - max favorable excursion - reward?

Since we are targeting the mean or the VWAP, we would need to consider where the low is. Typically it will be 25 to 35 points from the mean, so that is the path length that you are intending to capture. You should also factor in the usual time that it takes for price to traverse that length, which is around 1 hour. Please do note that we publish these figures for reference on a daily basis in the trading room. Have a look at the snapshot below.

3. What is the probable - max adverse excursion - risk? - Now that you know the possible target for your trade you can define the risk the way you prefer. Given the high probability of this setup you can have a fixed 1:2 risk reward and in an even where the stop loss does trigger you can re-enter again once the new low is formed.

4. Trade Management Approach - While a fixed R:R is one way, there are people who scale in and out as well, usually with a hedge on the opposite side. Of course that is a more aggressive way of playing this set-up.

On a closing note, I was surprised that this setup is pretty common in other indexes as well. Do have a quick read of the blog post below.


Trading as a way of life : Jihan Bowes

This guy is awesome. Sums up trading pretty well. Do give it a dekko and don't miss the hip hop part at the end.