Our indices opened firm and gap up, and traded in positive territory for most part of the session yesterday, due to short covering(roll over of short position to next month series); and due to negative opening of European markets, profit booking of three day rally brought the indices to flat, to marginal,negative closing at the end of the session. With 60% roll overs being completed by yesterday, roll over pressure is mostly out the markets, however, volatility will continue, in view of impending Union Budget tomorrow at 11 a.m. by F.M. Economic Survey shall be presented in Parliament today, which will be also watched keenly by FIIs and Institutinal Investors.
January Settlement of Nifty being at 5137.45; our view is Nifty should settle above this point today at the end of the session. Nifty shall oscillate between 5200 and 5400 today, as majority of the investors / institutions are still sceptical about the markets.
Portfolio Pick for Long term: GIPCL(Gujarath Industrial Power Corporation Limited) which closed at 102 is a good long term bet, since it is in public sector, having book value Rs.70; with good profit ratios and is a dividend paying company. Accumulate and hold for long term at current price and on weakness at any time for building in portfolio.
Strategy for the Day: Buy 5200 calls on weakness and 5400 puts on rallies for intra day quick returns in current series.
Thursday, February 28, 2008
Settlement Blues!
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12 comments:
Dear Mr. Rao,
Personally I think you should lay low from trading for a while. It is normally advisable to do this after a string of losses. One must introspect and re-evaluate if the strategies chosen are suitable for the current scenario. Always remember the market is always right and one must know as Marty Schwartz put it in the Market Wizard book "ones uncle point".
However please do continue your analysis as I think you are a better analyst than a trader.
For those keen on trading at the current time I recommend an ema crossover system, which I find has been and is still profitable despite the current uncertain market situation. If you follow this system your loss will never g o beyond 2% of your capital on any single trade. It has returned way beyond 100% in the last 4 months. Here are the rules.
1)Buy when the 5ema crosses above the 20 ema on 10 min charts.
2)Sl is 0.8% from the point of entry.
3)Once your trade moves in the desired direction move SL to break even, this ensures a profitable trade never turns into a loss.
4)If your stoploss is hit do not re-enter till the ema's crossover again in the opp. direction.
5)Follow any martingale position sizing algorithm suitable to you.
6)Everyday 15 min before close buy an option of the opposite to your futures position of delta as close to one as possible. Next morning sell it. This is simply to protect ourselves from gaps which the nifty is prone to. I have found it is better to hedge ourselves everyday even if that means loss of potential profits in case the nifty gaps in the direction of the trade we have taken.
I have made a free yahoo chart of this strategy where you can paper trade for free and see the profitability which i strongly suggest you do.
http://in.finance.yahoo.com/q/ta?s=%5ENSEI&t=5d&l=on&z=l&q=l&p=e50,e200&a=r14,m26-12-9,p12&c=
When you start start with one lot of mininifty and once you are comfortable increase to 1 regular lot of nifty, thereafter slowly increase lot size.
It is important you start with 1 lot of mininifty and familiarize yourself with the system. I know liquidity is poor but it will gradually pickup.
Following this sytem you would have been long at 5110 upto 5340 and then short at 5340 till now at 5250 totalling 320 points in the last 4 days. You will have losses when the market ranges and volatility is low but your losses will never get out of hand.
Well this strategy fits into the title of this blog which is "Trading for profit on Nifty (India)"
Dear Mr.Ashok,
Thank You for the suggestion. Well my strategy is to capture the market movement, while protecting the portfolio.
1.By purchasing a put option, the portfolio is hedged against sudden fall in the market. It is the premium one pays for the month, like motor car insurance, where u get compensation only when u meet with an accident. In such a strategy, when u don't meet with an accident, should not think that u have lost the premium, which many people feel.
2.Similarly, when one withdraws the cash out of portfolio, for some need, but still wants to continue to participate in the further upside of the market, as we are in a long term bull market since 2003, buy a call option, where you pay a small amount of premium out of the cash generated by selling the portfolio.
There are number of strategies to recover the cost of premium paid if one has large portfolio and liquidity..then consider bull spread, bear spread, calender spread, collars, butter fly, ratio spread, straddles and strangles or a combination of some of them, if one is a professional and knowledgeable with derivatives.
vrkrao
Hello,
Trading is not all about profits alone. It is about "Minimising One's Losses and profits will follow"
I partly agree with Mr. Ashok and also with Mr. Rao. Your EMA Crossover system gives you money on paper for sure, there are umpteen trading systems which do that. The real question is has 'One' been able to generate such money?
I think, it would be better if you create an index of your trading strategies using an NAV method. I shall mail you the excel file Mr. Rao. This should help put all your strategies in perspective.
As far as I can see 6 out of 9 strategies have been profitable, which is a 66% Hit Ratio. People make money with a 51% Hit Ratio. So, these must have generated good money.
Vinay
Hello Ashok,
What trading system do you use? Is it Metastock? I have neither traded nor seen people trade using algorithms. So, if you can share on how you manage to do that, it would be really helpful.
Thanks,
Vinay
Dear Mr. Rao,
I appreciate your point of view but what I am basically trying to say is your strategies are clearly not working at the current time, If your strategy has a 66% win rate, which i don't think it does if you consider your intra-day strategies as well, one has to claculate the probability of taking 3 losses in a row. Everything is to be calculated in trading please understand it is a numbers game. One must then determine the stop loss so as not to lose more than 2% of ones equity on any single trade and if one takes more than 8% loss on ones equity one should stop trading for the month because something is definitely not right.
If you continue to do so you will blow your account.
This is what i personally do I used to list all trades in my website but my Dad started objecting so i has to stop.
Please understand you are much older than me and i have great respect for your analysis but if you trade like this you will not survive, which brings me to the conclusion you probably do not trade your own strategies.
If you know the market is volatile but does not make a significant me in either direction why are you trading straddles? Is it not reasonable to expect the market will not make a move large enough in any direction to cover the losses from the losing option.
Once the market starts trending you can apply your normal strategies once again.
At the current time i would suggest you purchase ITM naked options when you determine the market is at or near support or resistance (which is not very hard to do at the current time as the nifty is bouncing like a yo-yo.) Once you have purchased a call keep a strict stop loss, if it is violated you should square of your position and try at the next opportunity, believe me you will be better off in the long run. You could also try the bull call spread or bear spreads, any strategies which are profitable for small moves and at the same time limit your loss (even if it limits your profit its no problem, as long a your losses are limited, always cut your losses)
I strongly urge you to read this book, it is free and has no copyright, it will help you in your trading tremendously, pay particular attention to rule no 1 in the book
http://www.webtrading.com/phantom/preface.htm
Basic points i am trying to make
1)Never ever EVER let your losses run
2)Straddle like strategies are not the correct ones to be employed in the current market.
I hope you do not mind my constructive criticism after all
the idea it to trade for profit on the nifty :)
Hello Ashok,
If you can kindly answer my trading algorithm question, ofcourse only if you wish to.
Now, coming to your analysis of the strategies posted on this particular site, I find a few flaws in your argument, here are my two cents on them.
Your points in quotes and my opinion below
"If you know the market is volatile but does not make a significant move in either direction why are you trading straddles?"
V: The market would trade and trend in a direction after the breakout. Most probably the breakout would be on the downside, owing to global market conditions, liquidity etc, which is a separate discussion altogether.
"2)Straddle like strategies are not the correct ones to be employed in the current market."
V: I completely disagree with this. The current global situation is extremely bad, in terms of the write offs, again this is a different discussion. Also, straddle is the best to play volatility direction. So, as we all know volatility is greater in downward moves, any IV spike would push up the premiums of both Calls and Puts. So, straddle is the best strategy when in a range (low vol) and your expectation is for the market to break downward (High Vol)
Although the exact levels at which I would have initiated a straddle OR even a strangle would vary, but I broadly agree with the strategies.
Vinay
Dear Mr. Vinay,
I am extremely sorry for the delay in answering your question,I will definitely answer it.
First I will address your earlier post. It is true that strategies with not a 51% but even as low as a 40% win ratio are profitable but the thing to remember are they are trend following strategies with high reward to risk ratio's. Saying there has been a 66% win ratio and implying it to mean one has made money in my humble opinion is not an accurate statement if one is ready to risk a 100% of ones position (hold till expiry with no SL) for every trade taken. Mr Rao has made money from the graph which is a great idea but I wonder how long it will last considering he has had a 50% drawdown in a very short period.
I do not completely agree with you when you say Trading is not all about profits alone. It is about Minimising One's Losses and profits will follow. Minimising ones losses doesn't necessarily mean profits will follow but what it will do is ensure you're in the game longer. The only way to ensure profits will follow is if you minimize your losses and have a trading edge. So you definitely have to minimize your losses which we both agree upon but I am of the opinion one has to have a good strategy to trade the market scenario.
Regarding the ema crossover system actually its something I got when I ran an optimization of nifty 10 min data over a combination of several months on amibroker 5.0, a lot of people have tried this (they have run optimizations) an several combinations will work but this one suited me the best.
Will regarding whether it works or not I don't need convincing but you can definitely try it with the rules I mentioned and decide for yourself. Where as I do need convincing Mr. Rao's straddle strategies will continue to generate money in the current market scenario when I look at his graph and more importantly after suffering 4 losses in a row (not to mention intra day straddles.
Coming to the mm algorithm I am sorry I meant a suitable martingale pp technique (not necessarily computer generated) which can be applied to trend following systems like the EMA crossover which would exploit the fat tail distribution. I use Amibroker and have never used Metastock. In my opinion Neuro shell trader may suit your requirement, you could mail support with your query. I am sorry but I am not of much help here.
We are all here to make money and taking positions in anticipation of breakouts over a month or two is not a very good technique in my opinion. If the nifty has become range bound each successive retest the support/resistance level gets stronger and I would trade spreads in this range. Its already happened twice. If you had employed spreads at support and then at resistance although your profit potential is capped I think you would have at the very least generated money rather than taking 4 consecutive losses holding on to position in the hope of what the nifty may do.
Anyway I never listen to analysis or try to forecast future (ie short term) moves. From my limited past experience I have found it to be an exercise in futility. But maybe others can but from what I see it hasn't worked out to well with Mr. Rao so why not just do what the market is telling you?
IV is quite high currently is it not, I'm not concerned if it could go higher. So if IV pushes up premiums would'nt it be better to use sell strategies at the current time. Just asking I really have very little idea about options all I can see is that 4 losses in a row out of 9 with a 50% drawdown tells me something is very wrong with the current strategy?
You don't see this?
Once again I am very sorry for the delay. I have begun my foray into the exciting world of forex and that takes up most of my time. Mr. Rao, Mr. Vinay if I could make a suggestion have you considered trying out forex?
Oh and btw Vinay in my attempt to learn about options I had asked you a question regarding hedging in one of our earlier discussions here
http://tradingforprofit.blogspot.com/2008/01/nifty-corrects-30-from-all-time-high.html
which was Mr. Rao's blog entry titled "Nifty correct 30% from all time high", you have probablly missed it but I would appreciate an answer if you wish to, would help me understand how one can hedge with options.
Dear Mr.Ashok,
Thank you very much for the interest you have shown, suggesting me your views; You are welcome to give such feed back, which will educate all visitors to the blog, in the long run.
When markets are in uncertain zone, volatile and unpredictable and reacting to both domestic as well as global news, it is very difficult for any trader how much professional, using various technical tools. One must be making profit or loss in the trading in such an environment.
I am not suggesting the strategies for trading, when I mention in the table, they are for the entire series, to hedge against the portfolio or cash withdrawn as I mentioned earlier.
Some times intraday trading strategies mentioned are based on support/resistance levels on Nifty, like the one given on 28.02.2008; buy 5200 calls on weakness for quick returns etc.,
In fact, this strategy was employed by me as I could buy 5200 calls at an average cost of 55 (intraday) some 15 contracts and could sell at an average cost of 75 and make clean profit of Rs.15000/- at the end of the day.
Whether every person is able to do that is a question, which depends on his risk perception, skill of trading, using the stop loss mechanism, and how much time one spares with the trading terminal!
In my view, no trader can become rich over a period of time, Only investing in markets judiciously for long term pays rich dividends.
One should not expose more than 10%of his capital in the stock markets at any given point of time for trading. Trading profits give 'kick' as generally people feel that it is money earned without cash outflow at the end of the day.
Such people are the worst sufferers in volatile markets, and when markets snap a nastry surprise suddenly, as our markets witnessed one in January, 2008.
vrkrao
Hello Ashok,
Thanks for the answer. I shall check this new system out. I shall reply to your earlier query later today. I am extremely sorry, but I have an outing scheduled today.
One thing that we generally fail to realise time and again(including me) is; there is a massive difference between a Trader and Strategy based Investor/Trader. I work for the second kind through an investment bank :)
As a trader, I completely agree with you in terms of what you have quoted. But, as a strategy based (Quantitative And/Or Qualitative) investor/trader, you don't cut your losses short. You have a well defined holding period. This can't change overnight just becoz you have suffered losses. The strategy works in the longer haul.
So, now the thing about these strategies is like the following:
. Agreed that the maximum drawdown is 50%, so are the returns
. So, in these cases, as the volatility is high and the maximum drawdown is higher too, one would take up lower bets in terms of percentage on the total available portfolio
. If you have a portfolio of 1 crore, you would bet 5 lakhs on this. So, the total impact to the portfolio, is 1/20 th. This reduces volatility as well as the maximum drawdown on the portfolio.
Hope this answers your queries. So, once the move is anticipated and lines drawn, strategy would suggest, one would wait for the prey to fall line. Its a patient wait.
IV is directly proportional to the Option Premiums. As market is digesting the bad news very well, IV's have come down a tad.
I think we can replicate this for Nifty too. If Mr. Rao doesn't mind, I would be more than happy to share the system.
Vinay
Hello Ashok,
Answer to your question at:
http://tradingforprofit.blogspot.com/2008/01/nifty-corrects-30-from-all-time-high.html
Vinay
Dear Vinay,
Thank you I appreciate the reply.
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