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
| Symbol | Nifty Futures |
| Timeframe | Hourly |
| Trade Execution | MKT order |
| Dataset Length | Jan 2011 – Dec 2018 |
| Trading Commissions + Slippages | 0.03% |
| Initial Capital | 10,00,000 |
| Position Sizing | Upto 3 Lakhs (Fixed value) |
| Holding Period | Positional (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
Equity curve
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
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.
