What is the trend following?
Trend trading is a trading style that attempts to capture gains through the analysis of an asset's momentum in a particular direction. When the price is moving in one overall direction, such as up or down, that is called a trend. Trend traders ride the wave of either direction of the market.
The trend following trading is different from your regular trading. It does not predict market direction. Trend trading demands self-discipline to follow precise rules (no guessing or wild emotions).
To ensure stability and avoid against very high losses to the portfolio, we have embedded some risk
management measures based on current market price, equity level in your account,
and current market volatility.
What Is Index Future Based Trend Following Strategy?
It is the Nifty 50 future-based long-short always in position strategy. You are taking either a long or short position on Nifty 50 future based on your system signal. It is implemented on an hourly candle. That means our algorithm checks 7 times in a day and decides which position to take. It uses 3x leverage.
Stocks
Universe
It uses the Nifty 50 index future only.
How does this strategy work?
- The current lot size of the Nifty index future is 75
- So notional value of one lot is 15,000*75=Rs 11,25,000! (Here I am assuming the current Nifty 50 level is 15,000)
- We are taking 3x leverage that means we should have 3,75,000 in our account
- The margin requirement for each lot is (approximately 15%) 11,25,000*15%= Rs 1,75,000
- So, we are using 1.75L out of 3.75 lakhs as margin money
- This can be used either as cash or pledged securities (you can pledge your existing mutual funds as well)
Initial Capital | Drawdown % | Cash Required |
375000 | 50% | 187500 |
375000 | 40% | 150000 |
375000 | 30% | 112500 |
- This strategy gives a hedge to your equity portfolio. It makes money when the market goes down as well, which can't be done with equity long-only portfolios
- This strategy performed very well during market crash years like 2008 and 2020
- As we are using this strategy with a high leverage it is a high-risk high reward strategy. So it may not be suitable for everyone
- This strategy encounters whipsaw (losses) when the market moves sideways. It makes money when the market trends either upward or downwards
Algorithm Performance: -
This strategy has a win rate of around 40%. That means out of 10 positions (either Long or Short) only 4 times we correctly pick a winning position.
How does this strategy make money?
Here comes the important part of the payoff ratio. The payoff ratio = average winning percentage of the winning stocks/ average losing percentage of the losing stocks.
This strategy has a payoff ratio of around 2.5. That means if we are losing x amount on losing stock then we are making 2.5x amount on winning stock on an average.
Transactions: -
This strategy has around 60-70 trades in a year that means 5-6 trades in a month despite it is working on an hourly candle. So as a user you have to check for notification every hour so that if any changes are there in the position you can execute them.
Use Case:
-
Let’s say you have 9 lakh of equity long-only exposure (like
a mutual fund, ETFs, etc.). All these instruments are long-only types. So, in
case of a sudden market crash, your portfolio will witness a drawdown. To reduce
the impact of the drawdown if you have invested 3 lakhs in this strategy with
3x leverage (3*300000=900000) means your hedge. So, whenever the market
reverses the direction you will in the short position. So, you will earn here
while your long-only portfolio is losing the money.
Key to success in this strategy:
Discipline: - Just follow the steps which your model is telling you. Don’t override algorithm decisions even though you think that this particular trade is going to lose.
Patience: - Stick with the strategy through the long whipsaw period because no one knows when the market will start trending, which will compensate for the drawdown and generate profits.
Link to
check the live performance: -
