Teach a Man to Fish – "Rise of Machines" version

ag_fx

Well-Known Member
#1
I have been a long term member of this forum. My journey started on this forum more than a decade ago and back then there was one golden thread of this forum. It was called “Teach a Man to Fish”, in which one of the members had shared how to trade intra-day based on 5 minute charts. It was a very popular thread and filled with nuggets of gold for new traders to learn and use. I personally traded based on that for a while, but realized that it had a lot of discretion involved. Over the years, I have adopted my style to more systematic and moved to only quantitative trading. I will only put my money in a system whose rules are set in stone at the onset. No messing with it during execution. If I believe that system can be improved, then I treat the changes as a new system and look to back-test the changes.

This thread can be seen a modern reincarnation of the old “Teach a Man to Fish” thread. In this thread, I intend to set up a simple easy to follow – systematic rules based system. If you are trading these rules systematically, you will need strong discipline to stay in a trade and execute trades. The first aim in trading is to stop losing money. This thread hopefully will help a lot of newbie traders understand the power of and challenges faced in following a systematic trading system.

Before I get started, here are some of the points I’d like to highlight for everyone’s benefit.
  • This is not a Holy Grail – In fact no holy grail exists. You should try to find your edge in the market and trade that edge repeatedly. Some traders have this edge in their reading of the market. For others, like me – it has to be backed with data and analysis.
  • It will not make you rich overnight. You will have to put in hard work, document your trades, stick to the system to make a little bit of money on a day to day basis. However, over the long run you will beat the index market and returns – if you can follow this or any systematic system.
  • This is an intra-day system and will require you to track the markets in morning during open and pre-open.
  • What I am providing here is a template with a few parameters that I have set up based on my situation. You are free to make edits to better suit your trading style. However, once you make a change, stick to it and follow it to the T. Don’t fiddle with it time and again.
  • I personally don’t trade this system. Simply because my focus has been positional trading. I am looking to automate quite a few things about my trading and hopefully one day this too shall be automated.
 

ag_fx

Well-Known Member
#2
Trade Universe

First of all, we need to decide which stocks are we interested in trading. Ideally, I would want to create a screener that can track market open prices and identify stocks that have had most impact since yesterday close. As in we identify percentage change in price since yesterday’s close and today’s open. Based on the list of stocks that has shown maximum movement, we pick our universe.

However, this requires setting up an AFL or other type of screener. In absence of this, an alternate way is to trade based on Pre-Open of market. This information can be easily found on NSE website everyday at following link:

https://www1.nseindia.com/live_market/dynaContent/live_watch/pre_open_market/pre_open_market.htm

At 09:14 AM, identify top 5 winners and top 5 losers in the list above. This will be our trade universe for the day. We will look to long the winners and look to short the losers.

At times it may happen that some penny stocks may come into the list. I would suggest to remove them from the trade universe. You can either replace it with next ranked stock or only use remainder of stocks, depending on your preference.

 

ag_fx

Well-Known Member
#3
Daily Bias

To enter a trade, we have to find the bias of today when trading intraday system. You can come up with your own version of how to decipher daily bias. The pre-open market open helps in first bias. A stock that is trading higher in pre-open will likely be bullish for the day. Likewise, a stock being beaten in pre-market will likely be bearish on the day.

The second confirmation for bias that this system would carry is Open Range Bar trade (ORB). For the stocks in Trade Universe, look at the price in first 15 minutes of open. 9.15-9.30 AM. The following conditions should be met for the stocks to be in valid list:

  • For winners from Trade Universe – We want this candle to be green
  • For losers from Trade Universe – We want this candle to be Red
For stocks that don’t meet this criteria, discard them from your trade universe.

Edit: After a user pointed out, I looked at my past diary to see how severely did I follow this rule. It seems in all my analysis, I did not usually care about the color of open candle. One of the old notes I found was that this 15 minute candle color is not a good indicator of today's direction. I guess I must have dropped this condition later on. However, for anyone starting out, it is a good condition to keep the number of stocks to track - low.
 
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ag_fx

Well-Known Member
#4
Trade Entry

The entry should be break of high/low of the ORB. I suggest using a filter on top of the price. For every 100 INR in stock price, use 25-50 paisa as filter. This should be added on top of high or subtracted from the low to arrive at entry points.

  • Long Entry – For winners in trade universe – Buy at High of ORB + Filter
  • Short Entry - For Losers in trade universe – Sell at Low of ORB – Filter


Trade Exit

This is the most variable part of the system. I intend to share how I get this to set up. You can set your own rules.

Stop Loss

  • For Longs – Low of the ORB – Filter
  • For Shorts – high of the ORB + Filter
Take Profit

  • For Longs –
  • 50% position - Take Profit at Entry Price + 2x the ORB range
  • Next 25% position - Take Profit at Entry Price + 4x the ORB range
  • Last 25% position - Take Profit at Entry Price + 6x the ORB range
  • For Shorts –
  • 50% position - Take Profit at Entry Price - 2x the ORB range
  • Next 25% position - Take Profit at Entry Price - 4x the ORB range
  • Last 25% position - Take Profit at Entry Price - 6x the ORB range
All trades are closed at EOD. So you should punch them as MIS trades so that your broker can close it at EOD in case you forget.

Money Management

There are quite a few ways for money management. First you have to decide how you would assign your capital to the trades. The easiest way is to equally weigh them. That is if you have 1,00,000 to trade, then you are assigning 10,000 to each stock’s trade. You will buy/sell an amount so that not more than 10,000 exposure is in a given stock.

Since this is an intraday system, you can utilize leverage too. But remember that leverage would not only increase your income, but can also increase your losses.

Best way to trade this is to use a broker that allows you to trade intraday against your long stock portfolio holdings as margin.
 

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