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691 -702 Section A-Research paper Selective strategies for Intraday Trading -
An overview Eur
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Jalaja Lakshminarayanan
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Dr. L Jalaja
Abstract:
Intraday trading, also called day trading, is the buying and selling of stocks and other financial instruments
within the same day. In other words, intraday trading means all positions are squared-off before the market
closes and there is no change in ownership of shares as a result of the trades. The usefulness of intraday trades
lie in the fact that one can also short sell the instruments aiming to square it off by the end of the day if they
anticipate that the price of the instrument will go down. This is not possible in positional trading. Many people
are by and for moving to the intraday trading mode from positional mode, as they get to see the money at the
end of the day. Until recently, people perceived day trading to be the domain of financial firms and professional
traders. But this has changed today, thanks to the popularity of electronic trading and margin trading. While
there are numerous strategies adopted by various individuals and firms to increase their profitability in day
trading this study aims to analyze and present three such effective strategies that can be used for intraday
trading in primarily stocks, futures and options. It aims to suggest the entry and exit points for the traders with a
good risk to reward ratio
Keywords: Intraday trading, Short sell, Strategies, Stocks, Futures and Options, Margin, Risk to reward ratio.
M.Com, M.Phil, Ph.D College of Science and Humanities SRM Institute of Science and Technology (SRMIST)
Kattankulathur Chennai – 603 203
Email: jalajal@srmist.edu.in
DOI: 10.31838/ecb/2023.12.s2.092
and Yang (2016) analyze horse race betting data 2. If VWAP is falling it shows sellers in control
and find greater propensity to quote odds at round 3. If VWAP is flat then it indicates no one is
numbers, which they suggest is reflective of controlling the market, the price is in a trading
cognitive limitations of the agent who proposes the range
price. • Kuo et al. (2015) find that investors who
disproportionately submit more orders at round Current strategy which has been described
numbers (they classify this group as investors with under is ideal for trading index futures and
limited cognitive abilities) tend to suffer greater options where one can expect atleast a 1:1 on
investment losses. risk reward ratio if not more in a trending
market. To better the risk reward ratio one can
3. Objectives take multiple lots and square off 50% on 1:1
To study the VWAP strategy, its applications ratio while holding the other 50% with a
with entry and exit points revised stop loss at buying price.
To study the Fibonacci strategy
To study the strategies that can be applied in Strategy
huge gap up and gap down markets 1. Charts to use : Normal candlestick in 5 min
To study the risk reward ratio behind each time frame
strategy 2. Applicable essentially to index futures and
options
2. Research Methodology 3. The trader has to Choose any index future
The statistical data is collected completely from chart ( nifty or bank nifty ) which is traded
secondary sources such as backdated charts and actively
indicators. 4. 5 min timeframe with normal candle stick
patterns has to be opted for
3. Results and Discussions 5. Vwap line has to be activated on the chart.
Many brokerage houses give this facility on
5.1 VWAP Strategy (Volume Weighted Average their charts
Price) 6. The close of the first five minute candle has to
Definition of VWAP : In finance, volume-weighted be taken into consideration irrespective of
average price (VWAP) is the ratio of the value of a being red or green. The close of the candle has
security or financial asset traded to the total volume to be observed if it is above or below the vwap
of transactions during a trading session. It is a line.
measure of the average trading price for the period. 7. The trader needs to wait for a first set of
candles ( two candles either consecutive or
VWAP is the average price a security has traded at alternate of after few candles ) to close in the
throughout the day, based on both volume and same direction either above or below the vwap
price and is important because it provides traders line. It could be the first and second candle or
with insight into both the trend and value of a second and fourth candle or second and sixth
security. candle.
The VWAP calculation is performed by charting 8. If the above selected candle set has closed
software and displays an overlay on the chart above VWAP, then the trader has to bet
representing the calculations. This display takes prepared to take an entry at the break of the
the form of a line, similar to other moving high of the highest value of the two candles
averages. with a stop loss at either VWAP line or the low
of the lowest value of the two candles.
9. Alternatively if the First candle set closes
VWAP shows who is in control below VWAP, then the plan is to take a short
VWAP is an indicator, it indicates who is in control entry at the break of the low of the lowest
of the price (the buyers or the sellers). When a value of the two candles with a stop loss at
stock is traded above the VWAP, it means that the either the VWAP line or the high of the highest
buyers are in overall control of the price and there value of the two candles.
is a buying demand for the stock. When a stock 10. Target could be marked with 1:1 precision. But
price breaks and close below the VWAP, it is safe huge trending market could give an enormous
to assume that the sellers are gaining control over returns of 1:5 or even 1:6 in some cases
the price. 11. This strategy has been observed to give an average
7 wins out of 10 which is a good strike percentage
1. If VWAP is rising then it shows buyers in
control
Bank Nifty Chart on 30th August 2022 gains. The 1:1 was easily achieved while holding
We can see that after the first two closings above on to the futures or trailing the stop loss could have
VWAP and crossing of the high of the second given gains as easily as 1:5 or 1:6
close, the index ( futures ) rallied towards bigger
Entry 38890
Stop Loss 38829
First Exit 39060
Second Exit 39403
SL % 0.2%
Profit % 0.4%
Risk To Reward 1:2
Risk to Reward 2nd Exit 1:6
Nifty futures Chart on 23rd August 2022 while there was a downward break of VWAP line
at 10:35 followed by another low at 10:40.
Here it can be seen that the opportunity to trade However the low of the second break at 10:40 was
was provided twice. Once in the morning with a not breached and hence no trade was initiated. This
risk reward of 1:2 and again in the afternoon with a clearly shows that following the rules of the
risk reward of 1:2. Also it can be observed that strategy is as important as the strategy itself.
Entry 17460
Stop Loss 17407
Final Exit 17566
SL % 0.3%
Profit % 0.6%
Risk To Reward 1:2
It's common practise to incorporate Fibonacci with the 0, 0.382, 0.5, 1, 1.382, 1.618, 2.618,
retracements into trend-trading strategies. Traders 3.618 and 4.618 points
attempt to create low-risk entries in the direction of 7. The trader has to wait for any candle to break
the initial trend utilising Fibonacci levels in this and go above the 1.618 line on the Fibonacci
scenario as they see a retracement occurring within lines drawn for the stock with a volume which
a trend. Traders that employ this approach believe is higher than the 20 period moving average
there is a good chance that a price will revert to the volume.
initial trend after rebounding off the Fibonacci 8. The trader can take a long entry at the close of
levels. such candle and place his stop loss at the value
being shown on the 1.382 line ( or slightly
Now let us understand how to use the Fibonacci as below ) in the Fibonacci drawing.
a tool for trading and generating profits. 9. For the short entry, the candle has to break and
The underlying statement here is that this tool can go below the 1.618 line on the downside with a
be used for trading in futures and stocks as value of volume which is higher than the 20 period
options necessarily depend on volatility, demand moving average volume. Stop loss remains the
and supply and hence cannot be applied to option same at 1.382 line ( or slightly above ) on the
values directly downside
The strategy: 10. The trader can set his first profit target at 2.618
1. Charts to use: Normal candle stick in 5 minute levels on either side depending on the type of
time frame with volume chart at the base. entry taken and then keep trailing his stop loss.
2. Applicable to Index Futures, Stock Spot price 11. Extremely trending days have been observed
and Stock Futures. to take the value of the stock on either side
3. This strategy combines two tools. One is the beyond the 3.618 line however, it is always
Fibonacci series tool and the other is the advisable to trail stoploss once the value hits
volume chart for the stock or the derivative ( the 2.618 line.
Futures ) 12. This strategy also facilitates contra trading
4. The trader has to observe the first five minute when you observe that the value of the stock or
candle for the day which we can call as the the derivative ( futures ) is retracing from
opening range candle in general terms for this either 0.5 or 1 value or from 1.618 or 2.618 or
strategy so on. The opposite side entry can be taken by
5. Mark the high and the low of the candle after the trader depending on the risk profile
close. 13. This strategy has a good risk to reward ratio in
6. Taking high and low as the base points, using comparison to the other strategies and also
the tools ( as provided by various broker gives the trader an idea of the levels to which
charting softwares ), a Fibonacci extensions the stock or the derivative can travel and plan
have to be drawn above and below the candles his profit taking accordingly.
14.
Reliance industries Chart on 22nd August 2022. downside and reverses. Also observe the volume
We can observe an opportunity for contra trade which is lower than the 20 period moving average
when the price touches the 1.618 line on the
.
Reliance industries Chart on 23rd August 2022. on this break would have hit a stoploss. But again
We can observe that an attempt was made at at 11:45 am the 1.618 level was breached with
10:00am in the morning to break the 1.618 level volume above the 20 period moving average
but the volume was not supporting. Hence it volume and the stock zoomed to 4.618 levels
retraced back to 1.382. Had anybody gone long on Below table summarises the risk to reward
this break would have hit a stoploss. But again at
11:45 am the 1.618 level was brea
SL % 0.3%
Profit % 1.5%
Bank Nifty Futures Chart on 19th August 2022. opportunity for short selling the futures which
It is clear from the above chart that once the 1.618 would have given phenomenal profits.
level was breached on the downside, it was a good
SL % 0.4%
Profit % 1.2%
Bank Nifty Futures Chart on 25th August 2022. markets open at a significantly higher or lower
levels than the previous day’s close, it is called a
Gap up or Gap Down Opening respectively. The
As one can see from the above chart that the market percentage varies depending on the security or the
started reversing from 1.382 levels thereby derivative. Especially for Nifty Index, a variation
providing an opportunity for placing contra trades ( of over 100 points is a Gap on either side and
short sell trades in this context since market was similarly for Bank Nifty a variation of over 250-
going up ) 300 points is a Gap.
However it may also be noted that RR ratio does The strategy we are about to discuss can be applied
not apply to contra trades as these are just on the index futures and options with a very good
opportunity trades taken in respect to the prevailing risk to reward ratio on Gap Up or Gap Down days.
market condition. Hence it is advised that a strict
stop loss and trailing of the same may be applied Strategy :
while taking contra trades. Chart to Use: Candle Stick 1 Min Timeframe
Condition1 : Gap Down
GAP Up or GAP Down Strategy : 1. Look for the first green bullish candle which
Gap-up / Gap Down Defined : When the price of should be well within the first five minutes.
a financial instrument opens higher than the 2. Entry to be taken when the high of the candle
previous day's price, it is gap-up. Gap-down: is breached ( not later than next two to three
When the price of a financial instrument opens minutes )
lower than the previous trading day it is gap-down. 3. Stop loss to be placed at the low of the green
Gap-downs occur when there is a change in candle
investor sentiments. 4. Target a risk to reward of 1:2
Markets are very volatile and can never be Condition : Gap Up
predicted. One day the market could rally over 1. It is reverse of the Gap Down strategy
1000 points while the very next day could open 2. Look for the first red bearish candle which
lower than the previous day close. When the should be well within the first five minutes
3. Short entry to be taken when the low of the gap down big institutional players run to book
candle is breached ( not later than next two to profits or cover their stop loss resulting in the
three minutes) market retracing fast in the reverse direction atleast
4. Stop loss to be placed at the high of the red for a small amount of time. It is this momentum
candle that the retail traders can cash upon by using this
5. Targe a risk to reward of 1:2 strategy. A quick short trade would result in a
sizeable profit.
This strategy essentially aims at extracting profit by
riding the wave. When the markets open gap up or
Approx
700 Pts
First Green Candle
Gap Down
SL % 0.6%
Profit % 1.3%
Risk To Reward 1:2
Entry 37676
Stop Loss 37738
First Exit 37529
Second Exit 37317
SL % 0.2%
Profit % 0.4%
Risk To Reward 1:2
Risk to Reward 2nd Exit 1:5
5. References