Why #BANKNIFTY is the most suitable scrip for Intraday trend traders? |Momentum Trading in BANKNIFTY
Updated: Jul 25
Can trading of a #Banknifty benefits the trend followers in #Intraday trading? Well, the answer is Certainly, YES!. Statistics show that trading #Banknifty can add an EDGE in #DayTrading if you are a trend follower. Please read the full article to understand it completely. Let's Begin,
"Market moves in trends." I am pretty much sure that you have heard it from many media and traders. What exactly this means? It says there is a short term momentum in the direction of the market, and here is where trend followers or trend traders take advantage of this momentum. Usually, the trend followers try to align with the primary trend of the market.
Being a trend follower, what I learned so far is that volatility plays a crucial role in trend following. The volatility of the trading instrument is directly proportional to the trading opportunities and effectiveness of the trends. Compared to all the Indices, #Banknifty is the highest volatile and liquid scrip, and hence it's more suitable for the trend-following method. I am a trader who solely depends upon the data (Not my opinion), and I firmly believe statistics play a vital role in #Quant/ Objective trading. So, Let's understand my above statement in the language of data analysis. Before we move forward, you need to have an idea about the fundamental concepts of #MarketProfile. If you dont know about it, then you can watch my YouTube videos on these concepts and then reread this article. Learn about the Day STructure concept of #MarketProfile: Click Here.
I have defined a concept called Probability of repeatability and conviction in my book MasterMind of Day Trading. This will helps to get an idea of the occurrence of #MarketProfile day structures statistically. The #MarketProfile concept suggests that chances of encountering Normal Variation days are high among all the day structures. For example, how many times do you think NV days will occur if you check 100 trading days? Well, the answer to this question varies from one instrument to another.
If you are trading in matured instruments where most traders gather to trade, then the chances of getting NV days reduce when compared to the instruments with less volume. Well, the main reason is that. Matured instruments like #Nifty tend to mean revert in the majority of the cases, and they offer less magnitude.
Let's find out the probability of repeatability of the day structures in the real market environment.
The above image represents the probability of repeatability of the day structures. This study was done by referring to the last 11 years of data of #Nifty and #Banknifty. If you take NIFTY, out of 3051 trading days, 1377 days were NV days, which approximates to 45% of total trading days in the last 11 years. Similarly, the low probable day structure is the normal day, which has a 3% chance of repeating. Likewise, in BANKNIFTY, the highest possible day structure is NV day with 58% of total trading days, and a normal day is the lowest probable day structure with a rank of 6%.
What does this data signify? It suggests that if you work on trend-following strategies in #BANKNIFTY, then you have a fair possibility of having a positive expectancy or EDGE. Similarly, options selling and mean reversion systems often suit the #NIFTY. One has to derive the probability of day structures occurrence of a particular instrument that they are trading to have a fair idea of how the instrument behaves in different environments. It also helps in developing strategies in line with the nature of the trading instrument. To give you an example, a simple ORB system has generated fantastic returns over the last 12+ years in #Banknifty, where the same system does,t worked with #Nifty. Refer to the below images of backtested results of this method.
If you observe the above image, you can see that the same ORB concept, which has generated fantastic returns with #Banknifty, has been less performing when it comes to #Nifty. The main reason is the difference between the behavioural factor of these instruments. The moral here is one must develop the trading strategies in line with the fundamental nature of trading instruments.
Before we begin to develop any trading strategies, it is important to understand the nature of the trading scrips. And also, I have seen traders who mess up everything and trades 10+ scrips for day trading, but to be honest, it's not a long term solution, and you must starts to think in long term perspectives. Sticking with one or max two and following the trading plans with 100% discipline is what the trading secrete. Trading can be profitable with the most simple methods.
Always remember that "in Trading Less is More and keep it simple". Well, I hope this article was helpful and added value to your trading. If you like the details of this article, then please share this with your friends and hit the like button:)
Happy Trading 😎
Wishing you most and more,
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