the secret fundas of derivatives trading !

Month: September 2014

What Is Pairs Trading?
Pairs trading (also known as statistical arbitrage or spread trading), has the potential to achieve consistent profits through simple and relatively low-risk positions. The pairs trade is market-neutral, meaning the direction of the overall market does not affect its win or loss.

The goal is to match two trading symbol that are highly correlated, trading one long and the other short when the pair’s price ratio diverges “x” number of standard deviations (i.e. the zscore). If the pair reverts to its mean trend, a profit is made on one or both of the positions.

How to decide on a good pair trade is explained step-by-step in a easy to understand one-page pic –>

Click on any pair box to drilldown into more details to analyse it furthur->

NOTE: the Buy/Sell signal above implies for the stock ‘A’

Why Pairs Trading?
Pairs trading is a market-neutral strategy that boasts several advantages:

Controlled risk
Since one position is long and the other short, an automatic hedge is created, so even if market or the sector goes down, the losses on the long position will be offset by the gain in the short position.

Profit regardless of market direction
Another attractive feature of pairs trading is the ability to profit whether the market is going up, down or even sideways. This is because the strategy does not depend on market direction, but it’s the relative performance of the two instruments that determines each trade’s outcome.

No directional risk
Because profits depend on the relative price change between the two instruments, rather than from the directionin which each moves, directional risk is removed.

What are the risks involved ?

No strategy can be without risks, else it would be a money-making machine.

What we are trying to bet on is that if a stock outperforms relative to the other, and they generally have always moved together in the recent past, the underperformer should eventually catch up towards the mean & we could make a profit.

But what if the outperformer continues to outrun the other stock because of some specific news or event in that stock? So we must have stop losses in case the crossing of our SD line continues to break through & run away.

And that is why if you observed in our pic above.. the buy /sell signals which the MYFNO.com app auto-generates are only after the ratio AFTERcrossingoutside the 2SD lines comes BACK inside the band .

Will suggest you to first get confidence in this concept , by trying out some paper trades before actual venturing into real trading . You can also track the pairs you identify to a favourites Pairslist in the myfno app or even enter dummy trades to track in the its portfolio module. All tools in one app 🙂

The PutCall data at various strikes if seen as bar graphs ( especially the ‘change’ data) can give a birds-eye view of how the open interest is building up across Put/Calls at various strikes / expirys and where the buy-sell pressure should take place at which tipping point .

all explained in our one-pic selfies –>

markets look to sustain now & can rise from here as the putcall ratio seems to be turning up again ! 🙂

We’ve now built a powerful yet simple ALERTS screen in myfno.com(under the ‘INFO’ menu) where you can get important alerts of F&O indicators + Technical signals together in one screen during the live market also 🙂

You can also show alerts just for Stock only (summarized F&O data of all 3 month contracts) or even individual contracts of Futures / Calls / PUts by pressing their respective underlined letters or choosing under the ‘Show’ menu

You can also customize your view to just show your specific set of alert categories. This can be done by clicking the + / – buttons besides the category header to add/remove 5 rows at a time. and then you can save this view for re-use

Finally, you also have the power to do a quick find in the ‘find box’ by typing words to match in the set of alerts displayed eg.

you can type ‘year‘ to display only yearly high lows or

you can type a symbol say ‘ACC‘ to see all recent alerts of this stock or

We may have all heard people saying that maximum money is made in the first few minutes or the last few minutes of trade. But how to identify such opportunities and scan for this kind of high price/volume/oi action one needs the right tools and the keen insight to read such info.

In www.myfno.com we have created one such critical tool that can help you in just this.

In our app, you can actually see the %CHANGE in price/volume/oi between any custom time frame / interval.

So if in the last 15 minutes of trading session, if we set this %chg parameter to say 5 minutes from the interval menu as shown in the pic, then we can precisely see any action happening in just that last X minutes chosen, so any sharp price/volume/oi spikes are visible & can be used as a base to identify the high %chg stocks.

Essentially we can identify where positions are being taken at the end of the day by the ‘smart traders’ for selling the next day ( BTST – buy today , sell tomorrow )

Now these 5/10 min %chg we can see in many screens like

Markets

HeatMap

AdvanceDecline

Futures

I personally like to see the AdvanceDecline screen in myfno.com because besides the %chg, it also groups the stocks sectorwise, so i can see if the whole sector is also where the ‘smart money’ is moving in.

How to identify and what to look out for i’ve explained in this selfie– self explanatory one-page pic 🙂

some more candidates we identified with this funda so you could get a better idea of how to use this with more examples –>

We have created a readymade template for you to see price/oi/vol in advancedecline in a 10 min timeframe. Members can Just click on this link to see it live in action –>