An Intraday Trend-Following Trading Strategy on Equity Derivatives in India
11 Pages Posted: 18 Mar 2019
Date Written: January 13, 2019
In this article, we will present a trend-following based investment strategy on single-stock futures. Using the price movement of the recent past we are able to achieve a Sharpe Ratio of 1.7 on training data by cascading positions on successive positive signals and closing out positions if we hit a stop-loss. The stop-loss is computed using historical volatility. The universe is defined in an unbiased fashion to eliminate overfitting. We have used the top 75% most active single stock futures contracts and we have further filtered out products with low opening 15-minute volume. This was done to improve the scalability of the strategy. This might also help in avoiding contracts where less volatility is expected. We have trained our strategy on historical data from 2012 to 2016 and we have tested the strategy on the data from 2017 to 2018 data. Given the nature of markets in 2017-18, we have also looked at modifying the strategy to take positions more conservatively to avoid volatile situations. Empirical studies on profitable trading strategies are rare. We endeavor to shed light on the process of development of a profitable intraday trading strategy and we hope that this encourages collaboration in the active trading community.
Keywords: derivatives, trend-following, intraday, return periodicity, market microstructure
JEL Classification: G11, G12, G14, G120, C630
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