Background
NIFTY filled the large gap it created - . This is the zone, where I expected sudden movement and stood away from trading in that zone. This gap is not filled and NIFTY is looking as bullish as it can get. So from trend following perspective, only 'the stupid' trader can short NIFTY or BANK NIFTY. But very few times, crazy traders can bet on reversal. If it works out, it just looks great. If it does not, you may lose a lot of your hard earned money.
Idea
I observe that, during this up swing, from June start, NIFTY always reverses back briefly to its moving average. I took a 15 day exponential moving average as reference. Now let us assume, NIFTY repeats this behaviour. It may be a good idea to short it during expansion , usually mid to mid late in the reversion cycle. And then exit when it touches the 15 day exponential moving average.
Let's look at the data of earlier mean reversions.
Starting from May 27 cycle
Cycle#1 : 13 days -> 8 Up : 5 down
Cycle#2 : 19 days -> 17 up : 2 down
Cycle#3 : 13 days -> 9 up : 4 down
Cycle#4 : 9 days -> 8 up : 1 down
Let us also study price movement
Cycle#1 : 8 up covered 14% and ema moved 7.5%
Cycle#2 : 17 up covered 10% and ema moved 7.5%
Cycle#3 : 13 days -> 9 up covered 6.5% and ema moved 3.8%
Cycle#4 : 9 days -> 8 up covered 3.35% and ema moved 1.5%
NIFTY is in Cycle#5
NIFTY has moved for 10 days up and covered 4%. In this move EMA has moved 2%.
As VIX is below 20, there is a good probability that some kind of mean reversion behaviour will happen in the next 10 days. Even if there is similar momentum the moving average will go up by 2%. Currently 15 EMA is around 11400.
What can go wrong
NIFTY keeps climbing steadily and never touches its 15 moving average in more than next 10 days.
The 15 day moving average overcomes my entry price, making it surely a loss making trade. I’ll exit the trade there
There can be very large upside movement causing the whole plan to get messed up.
There is reversion, but NIFTY is just short of 15 day moving average and reverses quickly without touching it.
Overall, if all these risks are assumed, the trade looks good. Hence I shorted 2 lots Future
August 27 : SEP FUT @11572
August 28 : SEP FUT @ 11665
Current target 11400
In this strategy target gets updated every day and there is no stop loss.
NIFTY filled the large gap it created - . This is the zone, where I expected sudden movement and stood away from trading in that zone. This gap is not filled and NIFTY is looking as bullish as it can get. So from trend following perspective, only 'the stupid' trader can short NIFTY or BANK NIFTY. But very few times, crazy traders can bet on reversal. If it works out, it just looks great. If it does not, you may lose a lot of your hard earned money.
Idea
I observe that, during this up swing, from June start, NIFTY always reverses back briefly to its moving average. I took a 15 day exponential moving average as reference. Now let us assume, NIFTY repeats this behaviour. It may be a good idea to short it during expansion , usually mid to mid late in the reversion cycle. And then exit when it touches the 15 day exponential moving average.
Let's look at the data of earlier mean reversions.
Starting from May 27 cycle
Cycle#1 : 13 days -> 8 Up : 5 down
Cycle#2 : 19 days -> 17 up : 2 down
Cycle#3 : 13 days -> 9 up : 4 down
Cycle#4 : 9 days -> 8 up : 1 down
Let us also study price movement
Cycle#1 : 8 up covered 14% and ema moved 7.5%
Cycle#2 : 17 up covered 10% and ema moved 7.5%
Cycle#3 : 13 days -> 9 up covered 6.5% and ema moved 3.8%
Cycle#4 : 9 days -> 8 up covered 3.35% and ema moved 1.5%
NIFTY is in Cycle#5
NIFTY has moved for 10 days up and covered 4%. In this move EMA has moved 2%.
As VIX is below 20, there is a good probability that some kind of mean reversion behaviour will happen in the next 10 days. Even if there is similar momentum the moving average will go up by 2%. Currently 15 EMA is around 11400.
What can go wrong
NIFTY keeps climbing steadily and never touches its 15 moving average in more than next 10 days.
The 15 day moving average overcomes my entry price, making it surely a loss making trade. I’ll exit the trade there
There can be very large upside movement causing the whole plan to get messed up.
There is reversion, but NIFTY is just short of 15 day moving average and reverses quickly without touching it.
Overall, if all these risks are assumed, the trade looks good. Hence I shorted 2 lots Future
August 27 : SEP FUT @11572
August 28 : SEP FUT @ 11665
Current target 11400
In this strategy target gets updated every day and there is no stop loss.
Trade active:
Booked partial profit. Covered one lot of nifty 11554.4.
Risk mitigation plan for not reaching ema 15 - book partial profit at ema 9. This is very close. I wont wait for next 20 points.
Risk mitigation plan for not reaching ema 15 - book partial profit at ema 9. This is very close. I wont wait for next 20 points.
Trade active:
So far going good. 11427 on spot..very close
Trade closed: target reached:
Near target (20+-) in just 1 day of holding. Out of this trade. Booked profit -> 17,061.25/-