To begin with my strategy just includes trading Nifty futures as it meets one of the most important criteria of trading - Liquidity. Also this strategy is purely for intraday trading. When we talk about trading strategies I have always believed in simplicity. The more simple a strategy is the more flexible it becomes to tweak it as per market conditions (such as widening of true range, increase / decrease in volatility. First I lay down the constraints and criteria before I put down in my strategy.
- Liquidity: The security to be traded is enough liquid. Nifty satisfies this condition.
- Simplicity: It must be simple to enable quick decision making. A good strategy is always with less number of indicators. This strategy doesn't require any indicator apart from one.
- Strategy Operation Cost: One of the most important challenge for me was to be able to trade Nifty with this strategy without any geeky looking, pricey trading software. We don't realize and take into consideration the capital outlay for the trading software that you use to crunch the data real-time while calculating the overall profitability. If your strategy does not work the expenditure on such applications go bad. You don't need any software to play with this strategy. Just the basic trading application will do. Recommended: Kite or Pi
- Low transaction cost: One of the most important criteria. Zerodha satisfies this.
- Ability to Trade from anywhere: A full time trader must know how to trade when there is no internet or a computer. I also put this as an optional constraint that what if you just have a basic phone and want to trade using this system you should be able to.
Having broadly stated the constraints let me now put the strategy which is known as the "Opening Range Breakout" (ORB) Strategy. This is not a new strategy and is widely used by traders across the globe. I have fine-tuned the strategy to meet trading Nifty. I shall right away begin explaining in a step by step form how to trade using this strategy.
The recommended software for this is Zerodha's state-of-the-art Kite and Pi
- The chart should be of intraday and on a 15-minute candlesticks. Start your day by just witnessing the price actions between 9:15 AM to 9:30 AM.
- Exactly when the first 15 minute candle is formed create two horizontal lines, one at the Highest price of the candle and second at the Lowest. Your chart should look like below. If you don't have access to Kite just note the Highest and the Lowest price observed during 9:15 AM and 9:30 AM.
- Apply SMA-40 on Volume chart.
- Now all you have to do is just wait for the breakout. We initiate a BUY on the next candle Open when the Price breaks out the upper range and closes above it along with Volume more than SMA-40. Conversely, we initiate SELL on the next candle Open when the price breaks out the lower range and closes below it along with Volume more than SMA-40.
- Profit taking - After trading full time since 5 years I feel no hesitation in saying that you would be the happiest trader taking 10 points in Nifty every day. There are many versions of profit taking though using this strategy. Sometimes it also pays off to keep holding till 3:00 PM but more often than not if the trend changes in the middle you can hit the stop. However, I would go for just 10 points. So the first order using this strategy will always be a Market Order and the trade will always be closed with a Limit Order.
- Stop loss - For Long trades: When the opening range is more than 50 points my stop loss is the close below the mid-point of opening range and when the opening range is less than 50 points my stop loss is the close below lower range. For Short trades: When the opening range is more than 50 points my stop loss is the close above mid-point of the opening range and when the opening range is less than 50 points my stop loss is the close above upper range.
- Also to check the general trend I use SMA-50 & SMA-100 on the Price chart and the Price should be above the High of the latest gone Expiry Day for an uptrend OR Price should be below the Low of the latest gone Expiry Day for a downtrend. If it is in the middle of the High-Low of the latest gone Expiry Day I take it as sideways which also forms a part of an another strategy called Expiry Range Breakout (ERB) but it isn't for intraday trading and I am in the process of fine tuning it.
No strategy is perfect and is bound to have whipsaws. Trading overtime and sticking to only one security gives you insight about its behavior and helps in decision making. It's like if you spend maximum time with a girl you get to know what makes her mood swing and you start getting better in guessing how she is likely going to behave. Loving your security and being faithful to it works.
A trader of security is just like any other trader of any commodity or product. Rather dreaming of getting rich overnight he is better off developing an attitude of being able to trade every day with a decent profit.
Market gives you what you deserve not what you ask for.
Of course this was just an overview and not a detailed report of the trading system along with the back testing. Nevertheless, it lay down a decent foundation.
A lot of improvement came from reading a research paper titled "Trading System Development: Trading the Opening Range Breakouts" by Mehmet Emre Cekirdekci and Veselin Iliev at Worcester Polytechnic Institute.