The below mentioned strategy can optimise the hit ratio of Supertrend upto 80%.
This is a Strategy which combines the following
- Supertrend as the indicator
- Nifty trading
- Delta Neutral Option Strategy
Supertrend is a trend following indicator, which has around 40-45% hit ratio in five minute time frame. This means out of hundred trades (long + short) taken on basis of supertrend, approximately 45% will hit the target and in 55% the stoploss will be taken out. Even with this hit ratio supertrend is a clear winner because of using trend following. In the cases when target hits, the profits are big and in cases where stoploss hits, the losses are small. So on an average if we keep on capturing less number of big profits compared to more number of small losses, in the end , the overall portfolio would be in profit over a period of time.[wp_ad_camp_5]
Now just imagine, if we can make a trading system, where we can capture only profit making trades and eliminate the loss making trades, what an invincible system it will be. It is not possible to eliminate the loss making trades by 100% but using this trading strategy we can minimise the loss making making strategy by atleast 60-70%. This 60-70% elimination of loss making trades on an average will take the hit ratio of supertrend to approximately 80% hit ratio.
This trading system works perfectly in nifty as there is good liquidity in different strike prices of options and also in near-far month contracts.
The trading system
- All buy signals should be executed in current month contract of nifty
- All sell signals should be executed in next month contract of nifty
- All option selling should be done in current month only
- First trade in single lot and master the system before scaling up
Buy one lot(current month) when the supertrend gives a buy signal
Sell one lot(next month) when the supertrend gives a sell signal
Exit (if in profit)
Square the profit making position.
Exit (if in loss)
- If you are long in nifty and stoploss hits, don’t square the position, just make it delta neutral using nifty options.
Eg: you are long in nifty at 8741 and stoploss hits of 8720, hold the long position and sell 3 lots of 8800 CE at 51. How this works, the delta of one lot nifty is 1 and delta of one lot nifty 8800 CE is 0.37 (todays value), so we are 1 delta long in nifty and 1.11 delta short in call. After executing this, we are delta neutral on this position and as time passes, this delta neutral position will become profitable and we can square off entire position without taking a loss
- If you are short in nifty and stoploss hits , don’t square the position , just make it delta neutral using nifty options.
Eg: You are short in nifty future at 8797 and stoploss hits of 8820, hold the short position and sell 3 lots of 8700 PE at 58. How this works, the delta of one lot nifty is 1 and delta of one lot nifty 8700 PE is 0.43(todays value), so we are 1 delta short in nifty and 1.29 delta long in puts. After executing this, we are delta neutral on this position and as time passes, this delta neutral position will become profitable and we can square of entire position with out taking a loss.
Using this above Strategy we can take the Hit ratio of supertrend upto 75-80%. This has been tried and tested for Nifty only. Kindly first trade in small quantity to master the system before taking huge positions. Basic knowledge of Delta Neutral hedging strategies is required. For any queries on this, I can be reached at [email protected].
68 Replies to “Game Changer Trading Strategy for Nifty based on Supertrend”
I didn’t understand the rational. What if we get further trade signals while we are in delta neutral strategy?
Should we ignore them? Then we are not taking advantage of Suertrend! Can you publish your back testing report ( i believe you have to hand create report based on strategies executed).
Btw, good thinking process.
Thought process definitely one have to appreciate it. However to execute this strategy during loss trades and keep continuing with other Signals one need to have adequate amount of margin to catch all the trendy moves in the market.
Otherwise skipping the signals and waiting for the losses to turn positive might kill lot of good trades. how do you manage that?
Yes.I thought so too. Lets see if it works. Starting with one lot.
@cp we have to take each and every fresh buy and sell signal generated by supertrend
When we are short and sl hits we sell puts. What about the buy call which comes with the sl? do we simultaneously take that?
My question too. Do we take the subsequent call?
@thanveer yes we take each and every signal of supertrend
What happens if market dumps more than total value of calls sold? For example in the first example long at 8740 SL 8720 and selling 3 8800CE @51 instead of booking loss, if market falls beyond 8800 – 3*51 I.e. 8649 and stays there the calls will go to zero and the futures position will keep losing money.
This is a flawed strategy – you will end up wiping your capital on a black swan day. Take an example where nifty tanks to 8000 from 8740 in the above trade. Your loss is 740 pts – 153(money made from selling calls) I.e 590 pts with no way to limit the loss even after that since you don’t book your loss.
on black swan day, you will loose everything you have in months…. no strategy works as connectivity to brokers becomes slow and within few minutes you see floor on counter and you don’t get chance even to act on signal. Not possible to time market without dealer terminal or automation. ( my opinion)
@cp you are right. But we have our position sizing and alternate channels of trading for black swan type of days. proper money management and position sizing will be able to take care of black swan days. think optimistic, maybe on black swan day trend is on our direction. why think only pessimistic. after all supertrend is supposed to be keeping us in the direction of the trend.
@chandan delta neutral hedging is monitored in real time, so if ever such a situation arises, and top of all we have our position sizing to take care of such uncertainty
So you’ll keep selling calls as market keeps falling….isnt booking loss easier? Too much margin will be used up if you have keep selling more and more calls are position goes against.
Chandan. You are forgetting the fresh short position we have taken on the sell call
@chandan we dont keep selling calls. we sell only as required to keep position delta neutral. our goal from delta neutral position is not to earn but to just breakeven the position
Can you explain in detail how you will handle a circuit day(if price suddenly crashes 5-10%). How exactly would you delta hedge the position…for example at every hundred point drop in nifty what exactly would you do with the options. Pls give some specific strikes in the example so that strategy is more clear.
.also implied vol will go up that day..how do you account for that.
@chandan total wipe out is not possible, you are forgetting our second leg of nifty sold in next on fresh signal. kindly read the whole article carefully, you are getting it wrong
What happens if market is choppy and short also gets stopped out? You would have sold puts as stop for that.
Do you hold all positions till expiry and keep taking fresh positions or remove the calls if another long trade comes now(you have a long future hedged with short calls running)
@chandan, i request you once kindly atleast do paper trading, if not real trading.
this is a game of probabilities.
we are just improving our probabilities of winning.
we are not trying any holy grail-no loss type of situation.
This strategy is based on supertrend and how to improve the probabilities better in our favour.
This is a multi-leg strategy involving future prices of two different month contracts and corressponding options prices, so its not possible to assume things.
you need to trade it out to know the outcome.
try it once,
For a common man who want to live tension free life, simple buy & sell signals are best ones.
This kind of strategies are for specialists only.
@osk your are right, this strategies are for traders who want to go the extra mile for optimization of the already successful supertrend
Your strategy looks interesting. What will happen if my NIFTY long reaches back to its Buying Price. Wont the losses will be more OR as option value decay with time it will eventually covers up?
@yashodhan The option decay will be enough to cover up the nifty drawdown
Any trend system with a hit ratio of 40% can have 8-10 losing trades in a row. This is simple statistics…no one can escape this… If we assume 10 losing trades in a row, then according to your idea, we will have 10 new futures position + 10 sets of options being sold. Even if you use 1 lot per trade, we are looking at margin level of approx (1*10trades) = 10 lots in futures margin + (3*10) = 30 lots of selling options which is close to 30 lots of futures margin…Total = 40 lots worth of futures margin.
In our example, due to statistics, if we have 10 losing trades in a row (every trade, we trade with 1 lot of futures), then one should have at-least 40 lots worth of margin. Some brokers, might offer margin benefit as we are buying futures and selling options. Still, for convenience purpose, lets assume that the broker blocks only 35 lots worth of margin(instead of 40 lots worth of margin)..So, to hold these 10 trades and take the next 1 lot futures trade, we need at-least 36(holding 35 and new 1) futures worth margin. Currently, overnight margin for 1 lot NF = 16K..So, 5.76 lacs is needed to stay afloat in this idea…thats a whopping lot of money to have to trade 1 lot…so, idea is flawed by itself.
And on top of that, if you believe that the professional trader focuses on ‘how to avoid losses’, you are badly mistaken..If you ever have the opportunity to watch a successful trader, you will see that they don’t worry about where the market is going or whether the current trade will be at loss. They aren’t looking to tweak their indicator as well. They are worried about their risk on each trade. They are focused on money management. They ask if the trade being executed correctly? How much of their total account is at risk? Are the stops in the right place?
Rajandran – please think twice before posting these kind of ‘how to avoid losses in trading’ posts in your blog. I respect your blog’s content and these kind of posts looks like a sour apple. Its your choice to publish this comment or not.
Professional Traders focuses ‘how to minimize the risk’while amateur traders focuses ‘How to avoid losses’ 🙂
@ks saravanan if you can read the article, i have nowhere mentioned about avoiding losses. the whole article is about minimising the amount of loss. any good trader, be it amateur or professional, minimising risk is the first function or else he will be wiped out sooner or later
@Kunal : This is just an idea to think out of the box. Definitely such ideas are welcome to make the traders to think how to control their losses. Though its tough for the common traders to handle such positions one should definitely appreciate the way the author thought.
We are here to explore trading ideas not necessarily to be money making ideas all the time.
Thanks for responding to my comment. Agree that it was just an idea but what triggered my response was this statement — “Using this above Strategy we can take the Hit ratio of supertrend upto 75-80%. This has been tried and tested for Nifty only.”..the author wrote this in the last paragraph. He has tried and tested it, huh? I would urge the author to test this idea in live market for the next 6 months 🙂
These kind of statements should be avoided in a reputed financial blog like yours and hence the post. More over, author did not think through completely on how one exit from both futures and options. He just gave a blanket statement that we need to exit when the trade goes into profit. So, where does the 20% losing trades come from? Obviously, he’s hoping market will give a chance to get out and we both know, how that it will end.
Bottomline – am just criticizing the blanket statements and an incomplete article. Honestly, the article title would just attract more traffic but of no use to traders esp. novices.
What i see i this Delta Neutral can be to control losses in few of the trades which is practically possible for most of the traders. Not necessarily this strategy has to be applied for supertrend but can be applied to avoid any marginal loss in any kind of trading situation while trading derivatives market.
And If the author says he had already tested out already then you should give enough time for him to explain things rather than throwing brickbats at him.
I guess from next articles onwards the author might control his excitement and advice him to be more practical from a retail traders perspective.
I understand what Delta neutral strategy is. As someone mentioned previously, one adverse gap or movement will eat 3 months of profitsplus the amount gained on ‘loss saving’ trades. That is exactly why i want the author to try it in live market for 6 months. Not sure why people are so hung up on avoiding losses.
Well, any post that appear in your blog is a representation of the quality of the blog. So, it is better to avoid these kind of ‘not-so-responsible’ posts to maintain sanity and the overall image of your blog. But, who am i to talk about this? Its your blog, so your choice 🙂
I rest my case here. No more comments on this topic.
@rajendran thanks for putting in a word. you have got it right. we are just trying to optimise the result of supertrend. I shared this article in context of supertrend as its very easy for amateur option traders to understand. we follow complex derivative strategies also, which i will share in future articles
@kunal there is no holy grail in stock market. the current hit ratio is 40-45%. applying this strategy can take the hit ratio upto 80%. upto 80% means it can be anywhere between 40% to 80%. This is strategy , and as all strategies , the results will vary alongwith market. Yes i have tried and tested this for last one year before placing this on public domain. I would request you to try this out yourself and you can come up with any practical problems you face, rather than assume hypothetical situations with out trading real time. Come on please give it a try starting on a small scale.
@kunal, you are hypothetacally adding away positions , in real trading there may be at the most three legs of addition, not more than that. we follow a margin of twice exposure, that means keep a margin of 2lakh for trading 50 nifty. Moreover when we do delta neutral , we get margin benefit from exchange also. I have derived this strategy on the basis that supertrend may give 10-15 losses in straight line. please try it out on real time rather than assuming imaginary situations.
P.S. the quote you mentioned about successful trader is from Bramesh Bhandari, if i guess right.
As a trader, if he does not plan for the worst case scenario, then god bless him 🙂
I believe that you have been trading this delta neutral idea for the last 1 year. Great. Keep doing what you are doing. If your answers are gonna be like ‘it never happens in the live market’, there is no point talking on this issue.
As long as it works for you, great. But, when you come and post in a public forum, please be ready to answer questions with utmost clarity and to the point. Obscured replies like ‘try it out yourself’ or ‘it never happens in the live market’ are almost like cliches in trading world. Hope you get my point 🙂
And regarding the quote, it is not a quote..it is based on what i have seen in my decade long trading career. By the way, have never heard of Bramesh bandari. He must be a pretty important person and probably appearing in tv shows. As i don’t watch any of the financial channels (it does not do any good to my trading), don’t know about him.
Good luck with your future ‘advanced’ derivative strategies post.
P.S I have been trading full time for the last 8 years(trading for a living) and i know a thing or two about ‘teachers’ in stock market.
@kunal kindly re-read my comments. i never said “it never happens in the live market”. This is a multi-leg strategy, so you need to trade it, or atleast papertrade it if you are not willing to risk. Wowww, good to know that you are “trading for living” from 8 years. For such a great trader as you, trading it out must be very easy, as i believe that you might be allocating some risk capital for trying out new strategies.
P.S. we are in the same boat, i have been trading for a living since 2005 , approximately same years as yourself.
@kunal I request you also to kindly share your strategies from your rich experience of eight years, so other fellow traders can also benefit from it. Can you please share any wonderful strategy that you are successfully trading yourself??
I see sarcasm in your comment. A small goole search tells something like this —
“Mr. Thomas is a commerce graduate with specialization in accounting and holds MBA degree in finance and Marketing. He has a diverse experience of six years working at all levels in the field of Equity Brokerage. His core strength is excellent team management and strategic marketing. He is an expert in Technical analysis and has been providing technical education for last six years. His diverse experience and knowledge is helpful to the organization in framing the key strategies and Internal Policies. He takes care of the marketing activities and franchisee development at BVCPL. He also oversees the compliance and regulatory laws. ”
It clearly says that you take care of marketing activities and franchisee development at BVCPL. So, it is hard to believe that you are trading for a living.
Good luck with your marketing activites and i wish you well !!
@kunal thats a lot of hardwork, but that small google search was not needed, the details are already mentioned in my profile in the website where article is posted.
secondly if you had further read that small google search in detail, you would have come to also know that i am the director of that broking company.
i trade for a living, that is my venture for broking, you can further google and find that i have couple of similar ventures which are into stock market education and research activities in stock market.
There is no sarcasm intended, i seriously wish to know few strategies from a full time trader.
i believe the entire audience of marketcalls would also be eager to know some successful strategies.
Consider the following scenario Buy @ 8767 Sold 8850CE FEB 3 Lots 176.70 (Since we are very near to expiry So Next Month Series)
Now Stop Loss Hit @ 8740 So Sell One Lot Feb 8790 and Sell 8700 PE 3 Lots @ 145
Now actually we have made loss in future to compensate that we got better price in Options
In this Case futures are hedged them selves (What one should do on expiry?) on that case theoretically we Short Strangle 3 Lots. Normally Short Strangles would give money in ranged market and any Immediate wild move in one side would give problem. As per Strategy one can exit if the whole portfolio once he got profit.But !!!!! he did not gave exit Strategy for options Positions
Again take today as example any deceive move due to ECB meet on tonight would give series draw down to this portfolio.Usually one should not take short Strangle Just Before any important event. But No one can predict the future movement( For Eg Recent RBI announcement made many problem one these type delta Neutral Strategy)
I request the author to give exit Strategy on extreme situations..
Disc: I am trading Short Strangles for last 2-3 Years with quit success. Where the Key for the success is Strict Money Management
@ks sarvananan you have got it wrong, the rules are sell and buy signal should be followed in current month and next month respectively. all option selling should be in current month only as we are taking advantage of the theta value, current month theta value is always higher compared to next month. one more thing “selling 3 lots” is not a thumb rule. it can be one,two,three or four depending on the delta value of the options.
The exit strategy is very well mentioned in the strategy. for implementing this strategy you need deep understanding of supertrend and delta neutral strategy.
If possible then please share some back test trade based on your rules. Lot of arguments comments already made if you give some sample trades in last six months already lot of discussions have been done. A sample back test would give many answers
@K.S.Saravanan as this strategy involves multi-leg and involves option options which are sold on signals of supertrend, i am not able to prepare any AFL for this to be backtested.
Yes a lots of arguments and comments have been generated. I am very happy that i could contribute such a thought provoking article and thanks to all members for such a great brain storming discussion.
Trading can create such an addiction that sometimes addicts do not realize that the world is full of opportunities outside of trading. Good business strategies match our pockets.Trading with a small account frequently makes no economic sense if we consider opportunity costs.
Few quotes which had the most pivotal impact on me was from PTJ & it was drilled into my head by my current mentor and my own 3 years of experience “Mr Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain? I first decided I had to learn discipline and money management. It was a cathartic experience for me, in the sense that I went to the edge, questioned my very ability as a trader, and decided that I was not going to quit. I was determined to come back and fight. I decided that I was going to become very disciplined and businesslike about my trading. Now I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them. ”
I use Super trend extensively in my trading and i have found a way to increase success ratio i.e. As far as my own private proprietary trading is concerned i have stopped taking “every” technical signal as a day trader to execute only those trades which exploit the underlying fundamentals technically thereby eliminating “majority” of technical signals
Recent example – Since Modi win, If one would have followed “Long” signals only win rate depending upon ones setting of the indicator range from 50% with 1:5 to 67% for 1:3 R-multiples.
@django you are on the right way and doing excellent. The old saying was “think out of the box” , that can be modified for current scenario as “rather than thinking out of the box, just remove the box and open up the limits of thinking”. you are doing excellent job
when we enter any trade we do consider risk reward ratio and hence need of SL plays its important role…to deviate from our original position by adding or selling other instruments will haywire our money management…we cant effort to have diversions and diversions to come to original road…
@vijay agree with you, But in delta neutral hedging, it works differently from normal form of trading. We are not in anyway having any diversions. Our goal here is optimize the supertrend results and delta neutral is a way to achieve that goal
Fine sir but still lots of apprihations. ..Thanks for your reply
its a great effort by the siju thomas.
i dont know why everybody critisizing siju thomas for his post.
whats the wrong he has done.
we need out of the box ideas
i understand this strategy,its a great potential one.
yes i agree this strategy require more capital.
i welcome more posts from this author
once again i am congratulating him.
@Sai Thanks for the good words, very appreciated after lots of bricks. You can try this out. If you find any queries, you can reach me anytime at [email protected]
Hi Siju, Thanks for the sharing this strategy. I have not tried it yet in live market. I am just verifying it with historical data. sideway market movements are usually lose making time in super trend signal. how to use this strategy in that case? fortunately current market is in sideways from jan 21 to jan 27 2015 and gap open is against position signal. can you explain based on trade signals on these days? may be in your next article.
Should we exit only on the expiry day? During the month when signals turn up we only keep buying or hedging them in the next month. Is my understanding right?
@jesuraj, we dont wait for exit till expiry day, we exit as soon as deltra neutral position becomes breakeven or substantially around breakeven.
Good idea Mr Siju,
But can we short one lot in the money call in place of n number of @ the money Calls,
@the money call decreases rapidly compared to the other one, is that the reason.
Please avoid arguments and share your good ideas. Both consumes your & our time.
@hrushikesh, in the money call option sounds good. i have never tried it yet. will try out. thanks. you seem to have a good grip over options. yes hrushikesh,i agree with you, unproductive arguments drain resources. I was trading a nice strategy and thought to share it out with other fellow traders. i am working on a better strategy that may cover the flaws of the current strategy, but with variation. Will post a second article in continuation to the current article.
Thanks Mr Siju for quick reply.
I am learning from you like gurus.
Please release your next article ASAP.
Articles/simple synthetic option strategies dedicated to specific situation (like in the comments) may be helpful to most of the jobbers /traders, it may clarify most of the doubts.
Thanks for your efforts towards making trading simple n effective.
Thanks Siju. Eagerly waiting for your next post. Do not be discouraged by the empty vessels. Thanks Rajendran!
If we replace the otm calls with itm call, there will be no time value in it and hence the purpose of taking advantage of the time decay will be defeated. My opinion.
You said that you are going to propose some improvement. Is it ready?
Your idea is good and i would like to congratulate you for trying to innovate.
@rajkumar yes, i am testing supertrend only for option selling.right now taking live trades on the same. as soon as i am ready with some live trading results , i will post the article.
Hi Siju Thanks for sharing good straight. Pls advise is there any tool available where we can get the delta info? Thanks for your help.
@shivkumar this days option calculator are available in the trading terminal, there are couple of option calculator even in google play which you can use on your smart phone also.
70 points saved till now 🙂
@thanveer thats great. I am working on only option selling model for supertrend. once i am done with the testing in live markets, will post it here
nice article, if you want do delta neutral strategy why not trying coverd call with bear put spread for buy signal in supertrend & covered put with bull call spread for sell signal in supertrend
Whipsaws in any trend following system is part and parcel of the trading. Whipsaws can not be avoided. Generally market trends in 30 percent times and trades in range 70 percent time. So basically win loss ratio will be 30:70 for any trend following system including supertrend. If this system is giving winning ratio of 40 percent, no doubt it is a good system. Now the question arises how to earn with less than 50 percent win ratio. Incremental risk is an answer. Suppose your capacity of trading is with 4 lots. Start with one lot. If win again start with one lot. If lose add one lot after two consecutive losses. So that till 8 consecutive. Losses you will reach to 4 lots. Now don’t add further. The idea is when u catch a right trend you will ride the trend with more number of lots than losses. Back test this and if you want to trade bank nifty with 4 lots keep margin of 5 lacs. Please advise back test results as in manual back testing it is giving good result with roi more than 40 percent per year.
After win you will start with one lot again and the same process will be repeated till you ride the trend with more number of lots,
As per your strategy full position will be taken only after 8 consecutive losses, which is quite uncommon so till then we will be under utilizing the money, another thing we are considering the ninth super trend signal to be successful one (this is just based on back testing results that there can be 8 maximum consecutive failures), what if it turns out to be failure also,
All pyramiding techniques in trend trading is implemented after it is confirmed that we are riding a nice trend but here we are riding just on assumptions that ninth super trend signal will be successful after 8 consecutive failure
I am assuming worst case scenario of 8 consecutive losses. We can ride trend earlier too. The probability of trend catching with higher lot will be there. If any one can back test the above strategy it will be great.
how are you? i have just read your nifty supertrend/delta hedge strategy. just curious to know is it still working profitably?
also waiting for your next option strategy.