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.
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@example.com.