iCharts Discussions

[Stockhunter]

Hi Friends,

One more strategy for swings from me, and indeed one of my most favourite one's.

IMPORTANT : HIGH RISK HIGH RETURNS, TRADE IN OPTIONS ONLY.

I read about this strategy in Elder's book names 'Come into my trading room' ..again one of my cherished reads.

Though this strategy is proposed by Elder as a 'join the trend' kind of swing strategy however I use it for getting entries against the trend, make quick bucks and exit.

So basically I use this strategy to get into shorts when markets are going up and get into longs when markets are falling. Sounds crazy isnt it?


Well crazy it sounds, but the profits are crazier. However since we are betting against the trend, its a HIGHLY risky strategy hence should be done in OPTIONS only where you know the max risk in advance!!

Ok without going into much details, my strategy requires to plot an SMA envelope around 17 SMA on EOD charts. SMA envelopes on icharts can be plotted on Charts (premium) which are free to be used by all !!

Every scrip has a different setting for envelopes, the idea is that the envelope should cover 95% of the EOD candles leaving only 5% candles outside the envelope.

And these are the 5% candles (or days) which we wait for to enter our contrarion trades.

I will use ICICI Bank as an example here. For ICICI Bank the envelope size is 23% (or 0.23 setting on icharts).

Whenever markets rally and prices touch or go outside the channel walls, we short by buying PUTS. Now which put to buy?? Since I have already mentioned that its high risk strategy, we want to keep our stake small hence we will always buy deep OTM (Out of Money) puts. This will not just keep our risk small, it will also give better % returns on investment. We will try and buy that strike price which is closer to where EOD 5 EMA is currently placed since we want price to reverse and hit 5 EMA and then 11 EMA.


What if we buy puts when markets are wildly running up and next day we have another gap up? well, you either sit with puts since the risk is small.. or add more puts at much cheaper price and wait for reversal! usually within 2-3 days price reverses making your OTM puts ATM.

Now continuing with ICICI example, in the last trade, the short signal was given on 4th May when ICICI closed at 529 after a gap up. 5 EMA was at around 480-490 so we buy 490 PE. Next day ICICI gapped up again and closed at 569. at that point 5 EMA was at 530. As above you buy 530PE at this point and wait...

In next 3 days ICICI corrected and made a low of 513. At this point both your puts come in heavy profits hence you book

My experience - If you trade this strategy 10 times, you will end up doubling your option value atleast 6 times, come out at breakeven at 2 times and probably lose 50-60% 2 times.

Rest you can check the charts.... I am posting ICICI EOD charts with SMA envelope for your reference.. please see how price reverses when it touches or falls outside the channels.

Comments are welcome !

Cheers
SH

[nareshch]

Hi SH,

How to derive the envelop width for differant stocks and nifty ? Is that we have to try differant envelop settings and see that majority of candles liesbetween envelops?

Naresh

[Stockhunter]

[vinst]

Hi SH,

The 95% criterion to be applied to how much historic data? For EOD, shall one look for envelopes covering 95% of the prices in last 3 months or 6 months or 12 months or ...?
This is the only question remaining for me.

thanks and regards,
vin

[ConMan]

Hi SH

Thank You for a new strategy...

I feel this particular strategy will help a swing trader or a short term investor in right entry & exit points.

Few Questions:

1. Do you suggest we use 17 SMA for all the envelopes as a standard one...

2. There are times when the prices stay above the envelope for a longer than usual time... do you suggest we wait for the prices to come into the envelope and trade or just trade as soon as we see prices outside envelope

3. Is there a way to find our intraday envelopes?

4. I know you are not a fan of bollinger bands....but can we also use them in addition to the envelopes to execute trades....are they both compatible....

Regards
Anand Rathi

[Stockhunter]

[Stockhunter]

[ConMan]

HI SH

I have tried using envelope on DLF with 17,0.25 setting.

1.Kindly confirm if my setting is right.

2.Can you help me with how to deal with the area marked in circle.

3.Lets say I trade options with this strategy...are stock options liquid.?

Thanks

Anand Rathi

[Stockhunter]

Hi Anand,

Envelope looks a bit wide, I cant see 5% candles outside the envelope. Try reducing the width.

The area marked in circle is where you would lose 50-60% or even 100% of your option premium if you buy calls since the markets keep crashing even when they are out of channels.

As I said in my orginal posts, 20% of the times this trade would fail... however the rest 80% trades would be enough to give you overall handsome returns.

Cheers
SH

[Stockhunter]

Ok folks.. time for an update on this one... not sure how many people are tracking this but Nifty went way outside the channel after the monsterous gaps ups and circuits... On Tuesday when NIfty opened at 4600 buying 4400 or 4300 puts was not a bad idea at all as per this contrarion trading set up....

Please see how Nifty has been falling since then and currenlty trading at 4195 odd levels today ....

Similarly check out ICICI Bank charts .. from 800 to 700 now !

Cheers
SH

[ConMan]

Dear SH

I follow this actively...but instead of buying puts I went short on the market. I have few doubts...when the upper limit of the envelope is breached and when the expiry is near...which month option should one buy... also tell me if its a good idea to write the opposite option than to but the suggested option...in the sense should I buy puts or write calls.

How do we arrive on option strike price...

Pl help

[Stockhunter]

[ConMan]

Thanks SH

Can you also confirm on the exit of a particular contract...

[Stockhunter]

[ConMan]

Hi SH

DLF trading out of its envelope...I tried buying 5 EMA which is 370PE but the issue is only 8 contracts were traded today...should I buy 380PE where more than 50 contracts are traded..