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Intraday Trend-Following Trading Strategy on Indian Equity Derivatives

Last Updated on 10 February, 2024 by Rejaul Karim

Diving into the realm of intraday trading on equity derivatives in India, “An Intraday Trend-Following Trading Strategy” by Nishit Bhandari and Gaurav Chakravorty, affiliated with QPLUM LLC, unravels a nuanced approach to investment. Unveiled on March 18, 2019, the strategy leverages the recent price movements of single-stock futures, achieving a noteworthy Sharpe Ratio of 1.7 on training data.

The methodology involves cascading positions upon successive positive signals, coupled with stop-loss mechanisms based on historical volatility. The strategy, tested on data spanning 2012 to 2018, employs an unbiased universe selection, focusing on the top 75% most active single stock futures with enhanced scalability.

The research not only delves into the empirical rarity of profitable intraday trading strategies but also adapts to the volatile market conditions of 2017-18, offering a conservative modification. This article not only contributes to the limited body of empirical studies on intraday trading strategies but also beckons collaboration within the active trading community.

Abstract Of Paper

In this article, we will present a trend-following based investment strategy on single-stock futures. Using the price movement of the recent past we are able to achieve a Sharpe Ratio of 1.7 on training data by cascading positions on successive positive signals and closing out positions if we hit a stop-loss. The stop-loss is computed using historical volatility. The universe is defined in an unbiased fashion to eliminate overfitting. We have used the top 75% most active single stock futures contracts and we have further filtered out products with low opening 15-minute volume. This was done to improve the scalability of the strategy. This might also help in avoiding contracts where less volatility is expected. We have trained our strategy on historical data from 2012 to 2016 and we have tested the strategy on the data from 2017 to 2018 data. Given the nature of markets in 2017-18, we have also looked at modifying the strategy to take positions more conservatively to avoid volatile situations. Empirical studies on profitable trading strategies are rare. We endeavor to shed light on the process of development of a profitable intraday trading strategy and we hope that this encourages collaboration in the active trading community.

Original paper – Download PDF

Here you can download the PDF and original paper of An Intraday Trend-Following Trading Strategy on Equity Derivatives in India.

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Author

Nishit Bhandari
QPLUM LLC

Gaurav Chakravorty
Qplum

Conclusion

In conclusion, the presented intraday trend-following trading strategy on equity derivatives in India showcases a promising avenue for active traders. Leveraging a meticulous approach based on recent price movements, the strategy attains a commendable Sharpe Ratio of 1.7 on training data.

By strategically cascading positions on successive positive signals and incorporating a stop-loss mechanism guided by historical volatility, the methodology demonstrates resilience and risk management. The unbiased definition of the universe, focusing on the top 75% most active single stock futures contracts, ensures robustness and guards against overfitting. The strategic filter for opening 15-minute volume not only enhances scalability but also addresses potential low-volatility scenarios.

Empirical validation through training on historical data (2012-2016) and testing on subsequent years (2017-2018) lends credibility, with adaptability to market conditions further enhancing the strategy’s robustness. This contribution to the understanding of profitable intraday trading strategies encourages collaborative exploration within the active trading community.

Related Reading:

Momentum in the Indian Equity Markets: Positive Convexity and Positive Alpha

Market Timing with Moving Averages

FAQ

Q1: What is the main focus of the paper, “An Intraday Trend-Following Trading Strategy on Equity Derivatives in India,” and what distinguishes the strategy it presents?

The paper focuses on presenting an intraday trend-following trading strategy specifically designed for equity derivatives in India. The strategy distinguishes itself by leveraging recent price movements and achieving a noteworthy Sharpe Ratio of 1.7 on training data. It involves cascading positions on successive positive signals and incorporates stop-loss mechanisms guided by historical volatility.

Q2: How does the strategy manage risk, and what elements contribute to its scalability and robustness?

The strategy manages risk through a systematic approach of cascading positions on successive positive signals and implementing stop-loss mechanisms based on historical volatility. It ensures scalability by defining an unbiased universe, concentrating on the top 75% most active single stock futures contracts. Additionally, the strategy filters products with low opening 15-minute volume to enhance scalability and address potential low-volatility scenarios. This meticulous approach contributes to the strategy’s robustness and guards against overfitting.

Q3: What empirical validation does the paper provide for the intraday trading strategy, and how does it adapt to market conditions, particularly during the volatile period of 2017-2018?

The strategy undergoes empirical validation through training on historical data from 2012 to 2016 and testing on subsequent years (2017-2018). The paper also explores a conservative modification to the strategy to handle volatile situations in the market during the specified period. The adaptability to market conditions enhances the strategy’s resilience and further contributes to its credibility as a profitable intraday trading approach. The paper encourages collaboration within the active trading community by shedding light on the development process of such strategies.

You can find many more Research Papers here

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