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Intraday Trading Advice

  • Recommendations for Intraday Trading in Nifty using Futures

  • Profit Potential of 25 Nifty points per trade

  • Success Rate of 70%

  • 1 to 2 Trading Calls per day

Swing Trading Advice

  • Recommendations for Swing Trading in Nifty using Optionns

  • Profit Potential of 150 Nifty Points using Options

  • Average holding period of 2 weeks

  • Email alerts twice a day

Performance

Check our past performance here

Need help?

aishwarya@indexmatters.com

+91-81475-76739


Market and Trading basics

Intraday Trading

It involves not keeping market positions open overnight. Intraday trading is popular among traders who trade for a living. It demands time and patience, especially if the trader is doing it manually. Intraday trading also involves significant transaction costs, which can potentially eat up a lot of profits. It would be difficult to take home a net profit if you are not on discount brokerage. On the plus side, intraday trading is controllable based on the appetite of the trader. The intraday trader is not exposed to black swan risks that strike overnight. Since losses will be small (assuming discipline on part of the trader), the intraday style of trading offers potential to make money month on month or quarter on quarter consistently, by using a good trading system. People who do not have the time to analyze and trade the markets on an intraday basis can benefit from systems like Indexmatters, which give them reliable advise on when to enter, when to book profits, and when to cut losses, even if they don’t have the time to analyze and act like day traders.

Swing Trading

Swing Trading involves trading the swings of the markets. The duration of swings can be from a few days to a few weeks. The idea here is that stock markets (especially equity indexes) have short term swings that are tradable. It involves detecting market reversals. Remember, we need (and better should not) not predict a reversal that might occur in future. We only need to detect a swing once after it has happened and not too late. Unlike Intraday trading, swing trading is exposed to overnight risk and hence black swan events. Also, it demands that your tolerance to downside is higher. Some of the algorithms we have developed at Alphamatters indicate that you need to be willing to lose 2% of your trading capital in any given trade, if swing trading has to make sense. However, you can play the intraday game even if your tolerance to loss is as low as 0.3% per trade. Also, most swing trading strategies assume a trending market (up or down) and seldom detect a sideways market. We distinguish swing trading from positional trading. Positional trading, in our book, involves holding positions for a long time – couple of months and being tolerant to large losses. We don’t offer a positional trading product at the moment.

Index Trading / Nifty Trading

Why trade the Nifty or any Index? To start with indexes have the highest trading volumes. This also means that you have a liquid market to trade in. In India, Nifty derivatives account for 80% of the trading volumes in derivatives. Of this Nifty options make up the bulk, but volumes in futures are significant too. In index derivatives, bid-ask Spreads will be low (if you plan to cross the spread) and bid volumes as well as ask volumes will be high so indexes can usually absorb large market orders without impacting the prices too much. In Nifty derivatives, spreads can be as low as 5 paise (less than o.1 cent). The margin requirements are lower for index trading too, compared to stock trading. For example, in India, the margin requirement for the trading in Nifty futures would be 10%, whereas the margin requirement for trading in stock futures is about 16%. Lastly, Indexes are safer in terms of the volatility of movies. Stocks can gain / lose as much as 50% in a day. This can happen overnight too. If it happens in a direction favorable to you, that’s great. However, if it happens in the opposite direction, it can wipe out a lot of your wealth. In general stock prices can be a lot more than index prices. In India some of the high beta stocks move as much as 3% to 5% for every 1% the Nifty moves.

Trading Strategy

Profitable trading is about buying low and selling high. To achieve that, you will need a strategy. Trading strategy refers to how you enter a trade, manage it and finally exit the trade. A good entry is necessary for a profitable trade. However, a good entry alone doesn’t necessarily ensure profit. It is important to optimize your exit too. In this whole process of optimizing entry and exit, it is recommended to know, measure and manage the risk being taken. Trading strategy can be technical, fundamental or quant. We follow quant methodologies in all our offerings and trading style. We believe fundamental analysis works better for long term investors than short term traders. And we tend to be a lot more mathematical than typical technical analysts. It is useful to and paper trade it before putting real money on it.

Charts, Technical Analysis, And Quantitative Analysis

The basic assumption of technical analysis is that there is a pattern to prices and that charts tell a story and offer a clue about where the prices are headed next. Technical analysts understand markets in terms of trend lines, resistances, supports, Bollinger bands, Fibonacci retracements, double tops, double bottoms, head and shoulders etc. Classical theory about markets holds that there is no pattern in the prices and that markets are random. But technical analysis carries with it a couple of centuries of trader intuition. While you may not get an edge with technical indicators available in the public domain, these indicators and charts can be valuable inputs to quantitative techniques. The charts and indicators are also useful teachers to novice traders. However, it is important not to rely on subjective interpretations of charts. For instance, a technical analyst who believes in trend following, looking at the current nifty charts will predict a bull market going forward. An analyst who believes in mean reversion will predict a correction, looking at the same Nifty chart. There truth to both trend following and mean reversion philosophies, at different time frames. No trend lasts forever. But that doesn’t mean that you can take trades against the trend and still make profits. Long term investors might catch falling knives and make profits. It’s hard for traders though. In general it’s a good idea to be with the trend (if there is a trend) but not be too late into it. For instance, if you look at the Nifty chart now (Sep 2014), you will realize that the Nifty is at an all time high. But, you may want to wait for the sign of a turn down if you’d like to go short on the Nifty.

Indexmatters Intraday

This product is an intraday trading guide. It offers trading tips for intraday traders who trade the Nifty. The product uses futures as the reference for entry, exit and stop loss levels. However, it can also be used by option traders be using an at the money or in the money option to trade in place of the future. This can also be used as a decision support system by intraday traders who trade bank nifty futures / options or futures of high beta stocks. The product uses advanced machine learning techniques to make predictions and it is trained on 3 years worth of minute by minute data of Nifty and things that affect the Nifty (Rate sensitives, Broader Markets, Global Markets etc.). Indexmatters Intraday has in the past provided a profit potential of 25 Nifty points per trade, with a winning rate of 70%. However, please note that only a part of this translates to actual profit.

Indexmatters Swing

This product is an swing trading guide. It offers trading tips for swing traders who trade the Nifty. The product uses options as the reference for entry, exit and stop loss levels. It involves buying of options and not selling. However, it can also be used by futures traders be going long on futures instead of buying calls and going short on futures instead of buying puts. This can also be used as a decision support system by intraday traders who trade bank nifty futures / options or futures of high beta stocks. However, we warn that overnight positions on high beta stocks can be extremely risky. The product uses advanced machine learning techniques to spot short term trends and it is trained on 5 years worth of minute by minute data of Nifty and things that affect the Nifty (Rate sensitives, Broader Markets, Global Markets etc.). Indexmatters Swing has in the past provided a profit potential of 150 Nifty points per month, with a winning rate of 56%. However, please note that only a part of this translates to actual profit. Please note that past performance may or may not repeat in future. This applies to all our recommendations. Also note that we try to trade based on our own trading tips as much as possible. However, we do not promise that this is always the case.

Differentiators of Indexmatters offerings

    Unlike other Nifty tips vendors in the market, our recommendations are not based on comprehensive research, and not just plain indicators.
    Unlike other Nifty tips vendors in the market, we don’t promise the moon. We do not claim to make you rich overnight.
    We document the P&L of the trades based on our tips unambiguously.
    We do not claim 90% winning rates. Nor do we claim 100% annual returns.
    We are happy to show you our back test data.
    Although you pay us only for trading tips on the Nifty, we provide education on trading, investing, money management etc. via our website. Our goal is your financial success and your intellectual success. We would like to see that in a year’s time you can trade successfully, even without our trading tips.

Options Trading versus Futures Trading

Before deciding whether to trade in options or futures, it is important to appreciate the differences between the instruments and how they affect your trades. Here is the fundamental difference. Futures are binding 2 way contracts. The seller or a future and the buyer of a future are both obliged to complete the transaction on the agreed date, otherwise known as expiry. On the other hand option is a one way contract. The buyer of an option has no obligation, but only a right. For instance, the buyer of a call option has the right to buy the underlying, if the price of the underlying is above a threshold called strike price. Similarly, the buyer of a put option has the right to sell the underlying if the price of the underlying is below the strike price. The buyers of options will simply forego the price they paid for the options (called option premium) if the preconditions for exercising their rights don’t exist. Sellers of options on the other hand have only an obligation, but no right. Sellers of options collect premium and in exchange they are obliged to fulfill their obligation (to be the counterparty to what buyers decide to do) in case the buyers are in a position to exercise their rights. Leaving aside the complicated math behind option pricing, here are the things to remember.

    Futures are linearly and directly correlated with the underlying stock / index.
    Call options are directly correlated with the underlying stock / index. However, the relationship is non linear. There are other things that affect option prices (time to expiry, expected volatility in the underlying, interest rates, strike price etc.) The sensitivity of option prices to these things are measured using Greeks. Similarly put options are inversely correlated with the underlying stock / index. In other words, the delta of futures (rate of change with respect to the underlying) is nearly 100%. The delta of options can be anywhere between 0% to 100%. The delta of an at the money option is roughly 50%. For our strategies, we recommend trading with at the money options.
    Buying options is a very cheap strategy because options don’t cost much. However, options lose value (time value) every single moment. So it is important not to hold long positions in options for too long. But the holders of long positions in options (option buyers) can’t lose more than the option premium they paid. On the other hand holders of short option positions (option sellers) get to skim the time value. However, they run the risk of the position going badly against them. There is some loss of time value to buyers of futures as well. Those who hold long positions in futures give up what is called cost of carry. This is nothing but the risk free interest rate. Conversely, holders of short positions in futures gain this. But this is no way comparable to the time value decay in options. For instance if you buy Nifty futures worth R. 8000, you may give something like Rs. 40 for 1 month. However, if you buy a Nifty option of strike 8000, paying Rs. 100, you may lose the entire Rs. 100 in time value decay. That’s because, the entire. Rs. 100 you are paying is time value.
    Precisely because options are cheap, the built in leverage is high. Hence it is important to deploy only a small fraction of your capital for buying options. Ideally this should be less than 10%. If you are not a professional trader it is advised that you stay away from selling naked options. Typically an at the money Nifty call or put would cost Rs. 100 in the beginning of the series. (It is a function of volatility expectations and the value of Nifty ). So, you are only paying 1/80 of the price of the underlying to be able to bet on /against the price of the underlying. This means your leverage could be as high as 80x. However, as we discussed, at the money options have a delta of only 50%. This means, you are getting a leverage of 40x when you are buying at the money puts or calls on the Nifty.
    Option seller incurs mark to market gains and losses. i.e. the bank account of an option seller is credited or debited every day, depending on her gains / losses. Future buyers and sellers go through mark to market credits and debits too. However, option buyers do not go through this, as they can’t lose more than what they paid.
    Most importantly, in India, the transaction cost on options is much less than the transaction cost on futures. So options are better suited to short term trades. You are likely to save more on transaction costs than you lose on time value decay.
    You can use a combination of futures and options to create trades that exploit arbitrages if they exist. Again you will need to understand the pricing theories and some of the implications of the theories to be able to detect these arbitrages. We will not go into them at the moment.

Glossary

    Mark to Market: Daily gains and losses on a position.
    Margin: The initial deposit the broker takes from the trader.
    Leverage: (Value of the position)/(Margin).
    Long: A buy position.
    Short: A sell position.
    Call Option: A right to buy a stock or index (or some other underlying) on a particular date, called the expiry date (European option) at a particular threshold (strike price). If this right any be exercise anytime on or before the expiry, it’s called American option. A call option is supposed to have intrinsic value if the current market price of the underlying is above the strike price.
    Put: A right to sell a stock or index (or some other underlying) on a particular date, called the expiry date (European option) at a particular threshold (strike price). If this right any be exercise anytime on or before the expiry, it’s called American option. . A call option is supposed to have intrinsic value if the current market price of the underlying is above the strike price.
    Strike: The price above which a call has intrinsic value and below which a put has intrinsic value. At the Money Option: A put or call option whose strike price is the closest to the current market price. In the money: A call option whose strike is below the current market price or a put option whose strike is above the current market price.
    Out of the money option: A call option whose strike is above the current market price or a put option whose strike is below the current market price.
    Intrinsic value of an option: In case of an in the money, call option, (instrinsic value) = (option price)-((current market price)-(strike price)). In case of an in the money, put option, (instrinsic value) = (option price)-((strike price)-(current market price)). If the option is not in the money, its intrinsic value is zero.
    Time value of an option: The component of the option price other than the intrinsic value. For any option, (time value) = ((option price) –( intrinsic value)).
    Future: A contract between a buyer and a seller (via the exchange) to exchange the underlying stock or index (or commodity or currency) on a particular date at a pre-determined price.
    Expiry: The date on which all futures and options contract are settled.
    Delta: The rate of change of an option’s price wrt to the price of the underlying.
    Gamma: The rate of change of delta wrt to the price of the underlying.
    Theta: The rate of change of an option’s price wrt time to expiry.
    Vega: The rate of change of an option’s price wrt to the volatility of the underlying (forward looking).
    Rho: The rate of change of an option’s price wrt to the risk free rate of interest. Delta, Gamma, Theta, Vega and Rho are together known as Option Greeks.


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