Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

RSI Momentum Trading Strategy : Do Simple Trading Strategies Really Work? [Part3]

1 min read

Do simple Trading strategies really work in Indian Markets? It is the curiosity remains among most of the traders. Does a simple technical condition bring consistent returns in the markets despite commissions and slippages?

To test simple rules, I opted for a higher timeframe like hourly as most of the classical technical indicators create a lot of noise under lower timeframes.

It is a well-known fact that most of the indicators are lagging indicators and hence shorting using those indicators doesn’t make much of sense as most of the times fall is faster than the rise in the markets.

Here is a simple plain vanilla RSI momentum strategy where Nifty Futures is bought on the hourly timeframe when RSI crosses above 65 i.e increase in momentum and exit longs when RSI falls below 40 i.e decrease in momentum.

Simple RSI Momentum Strategy – Amibroker AFL Code

https://gist.github.com/02e56de54eec0606207215f1bee170d9

The moment we got into higher timeframe, commissions and slippages make less of a difference on a single script future instruments. But still adding a 0.03% for an index future like Nifty makes sense to get close to a realistic picture.

Backtesting Settings

SymbolNifty Futures
TimeframeHourly
Trade ExecutionMKT order
Dataset LengthJan 2011 – Dec 2018
Trading Commissions + Slippages0.03%
Initial Capital10,00,000
Position SizingUpto 3 Lakhs (Fixed value)
Holding PeriodPositional (Carryforward)

Results

Returns are moderate but worth watching in terms of no of trades (120 trades), drawdown and the smoothness of the equity curve. CAGR comes around 16.25% which is much better than parking money in FD or any other liquid instruments.

Recovery factor come around 9.44 which is phenomenal for a slow moving index like nifty futures. Sharp ratio is 1.38 which explains the smooth returns.

Payoff Ratio ( Ratio average win / average loss) comes around 2.33 which is usually a good metric informing the low risk trading strategy

Backtesting Report – RSI Momentum

Equity curve

Equity Curve – RSI Momentum Strategy

Underwater equity is measured in absolute terms rather than % terms. Measuring risk in absolute terms ( real risk in terms of money ) make sense for small traders. Underwater equity comes around 2,40,000 for a position sizing of 3,00,000 per trade on a Initial capital of Rs 10,00,000.

Drawdown Value (In terms of Money on Initial Capital)

Per Lot Risk

Per lot risk is an interesting metric which helps traders to evaluate whether it exceed the threshold of the traders risk taking capability.

RSI momentum strategy has a maximum drawdown of 565 points. And the strategy had generated 5890 points in the last 8 years.

Conclusion

Thought the strategy is low-risk moderate reward strategy, the frequency of drawdown per lot swinging between 450-565 points is around 10 times in the last 8 years which is very frequent and intolerable and annoying if drawdowns are going to happen very frequently.

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

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