Strategies for Swing and Positional Trading
In this article, we are going to discuss about some strategies that we can use in swing and positional trading, i.e. when we invest for a few days rather than just for a day.
Table of Contents- Strategy 1: For trading in NIFTY
- Strategy 2: Strategy for setting Stop Loss
Strategy 1: For trading in NIFTY
This strategy takes a top-down approach, wherein we follow the American market to get an idea of the forthcoming trend in the Indian market.
In this strategy, we aim to trade in Nifty, and for this we use:
- Monthly or Weekly chart of NASDAQ (National Association of Securities Dealers). From this we try to gauge the upcoming trend. We observe American market because the trend generally flows from American to European markets and then to Asian markets. So, American markets are considered the leader in world financial markets. We prefer NASDAQ as it reflects the American markets in a better way – it is made up of a basket of 100 stocks, in which big IT sector shares (e.g. Facebook, Apple, Google, etc.), and financial sector shares are also present. While, Dow Jones has a basket of only 30 shares and so is under-diversified. On the other hand, S&P 500 has a basket of 500 shares and so is over-diversified.
- Along with NASDAQ chart, we also observe the S&P 500 Vix of American markets. We use this to confirm our NASDAQ analysis. We use S&P 500 Vix because there’s no NASDAQ Vix.
- In Indian markets, we observe NIFTY, Bank NIFTY and India Vix Index. Herein, we try to find the resistance and support levels in NIFTY and/or Bank NIFTY charts. We also try to gauge the retracement that may come using Fibonacci Retracement. We use India Vix Index to confirm our NIFTY or Bank NIFTY analysis.
Apart from observing the price action in NASDAQ/NIFTY and doing our technical analysis, to predict the upcoming trend, we also need to check one more thing. Have a look at the price level at which the market closed last week, and compare it with the closing price of the current week. If the market has closed at a lower level than the closing level of the last week, it is a sign of caution – a downtrend may be coming. Vice-versa is also correct. We can compare at monthly levels too.
NoteNASDAQ is dominated by IT stocks. So, price action in NASDAQ is a good pre-indication of how the price of IT stocks will move in Indian stock markets. They have a positive correlation - if NASDAQ rises, Indian IT stocks generally rise too, and vice-versa.
Vix indexes are pre-indicators, i.e. they kind of tell in advance how the market is going to behave in the future. More the fear in the investors, more will be the value of Vix indicator. If fear increases, Vix will increase and the stock will fall.
So, the trend in Vix chart is opposite to that in stock charts (inverse correlation). Red candles (specifically lower lows) indicate that the market will keep going up. While, green candles (specifically higher highs) are a sign of caution – it means that a downtrend may be on the horizon.
Strategy 2: Strategy for setting Stop Loss
You may use Standard Deviation (SD) for setting stop loss and target in positional trading too (just as we do in case of intraday options trading).
For this purpose, we have to find the SD of the days since the options have started. We know that new options open on Fridays. If you are entering the market on Tuesday, you may take the SD of the previous 3 working days and set your stop loss and target accordingly.
If you enter the trade near the VWAP line (i.e. near the mean price), you may keep the stop loss as 1.5 to 2 times of the Standard Deviation, and the target as 2.5 to 3.5 times of the Standard Deviation.
Say the mean price is 100 and SD is 10 – then in a bullish market you can buy a call option by putting the stop loss at 80 to 85, and set a target of 125 to 130. You may book 50% of the profit once your target reaches 2 to 2.5 times of the Standard Deviation, and apply a trailing stop loss for the rest.