18 June 2014

Trade in nifty future based on daily volatility

Introduction:
Indian traders have realized that benefit of trading in the nifty future from past couple of years. However it is quite experienced that many traders never make any success in nifty intraday trade. Learning little simplest technique can make someone a winner in the nifty trading.
Interpret the daily volatility. It is the parameter which will gives you the most likely move the nifty future can swing in a day. In this case the term ‘swing’ means high and low difference in a day.
Then the next question is how to find the volatility. ?
To calculate the volatility the best procedure is refer the daily volatility column given in the NSE site against the Nifty future f &o quote section. You may get a figure 1.23 for 9th October 2009 price quote in the bottom of the page. In other words it says the nifty future has the potentiality to generate 1.23% returns today either in the buy side or in sell side.

For example - if nifty is trading at 5000 it will generate 5000 X 1.23%=61.50 point return. This small arithmetic information is sufficient enough for me to take a wise trade decision. Now it is the time to migrate to a more realistic example. On 9th October 2009 at 10:45 a.m. I found the nifty at 4999. At that time the prior swing has recorded high 5021 and low was 4973 and the daily volatility was 1.23%. 
The previous days’ closing was 5001. Since the daily volatility is a derivation from the yearly volatility I will calculate the return points from the previous days closing which is 5001X1.23%=61.5123 round it to 62 points. The next big thing u can do is u can take the clue from the midpoint of high and low of the current day. 
For example the midpoint is 4997.  the nifty high and low has created a swing of 48 points (i.e.5021-4973). current price 4999 suggests you are just above the midpoint (hence I have a chance to scale 62-26=36 point from here in upside or 26 point down from here to complete the calculated return of 62 points. The 26 points the difference between the low and the current price.
Now the last job is to derive a trade decision. Here the concept of cycle will get focused since your return is 62 points as per the volatility and every completion of 62 points will start a new cycle. It is often observed that if the stock trade above the mid point then it has the most likely chance of going up and in my case Nifty is above 4997(mid point ) and I will buy nifty at current price of 4999 for target 5035(i.e. 4999+36). Same time I will put my stop loss as 4997-27=4970. If the up side target is achieved then my next target will be in the 2nd cycle termination point of 5034+62=5096
similarly the 2nd cycle of the Nifty will be 4908(i.e. 4970-62).In between the 4970 and 4908 I will find one target at the mid point of it (i.e.(4970+4908)/2=4939 )the 2nd target will be the mid point of 4938.50 and 4907.50(i.e. (4939+4908)/2=4923.5). Same way the intermediate target of the upside move for 2nd cycle can be calculated.Now as per the calculation I have entered the buy trade and the stop loss is triggered and given me the opportunity to enter the short trade of 2nd cycle. You may surprise to see that that nifty low was 4923.05 on 9th October 2009. I too have the answer why the 2nd cycle halted at 4923? But it is beyond the scope of this article.
For your information I will once again inform you this value is calculated when nifty were quoting at 4999 and have neither made any of these calculated high or low.This same trick can be applied to all the stocks just by referring its daily volatility and applying the midpoint concept on it. 
You will be in a position to calculate many intermediate target points and most likely reversal points . However stock market has different price tags and each method has its limitation and can be applied only on selected group of price tag. These refined techniques we teach in seminar programs. Try to use the above discussed technique in Nifty Future and experience the success.

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