1) Idea/Hypothesis 2) Specify entry,exit, SL & position size 3) Generate trade log & Backtest Report 4) Test in diff. market condn.
5)Optimise the strategy 6) Evalute the robustness & stress testing 7) Track Real Time performance 8) Deploy
1) Idea( Eg. Theta Eating Strategy)
Options decay with passage of time.
I look at the theta decay curve & wonder that some decay is intraday and some is overnight.
Can I capture the intraday theta decay by creating delta neutral positions ?
Can we create intraday straddle to capture theta decay ?
Initial Logic :
Entry : Create straddle at 9:20 am
Exit : Close the straddle at 3:15 pm
SL : 10% of combined option premium
Position Size : 1 lot (CE & PE) per 2 lakh
3)Generate trade log & basic backtest report
The trade log contains all trades as per your trading logic.
Also plot the equity curve(cumulative P&L ) & certain backtesting metrics to see if the results are decent.
If yes then proceed further else discard the strategy.
4) Generate a detailed backtest report & test across different market conditions.
Look for metrics such as-
Outlier adjusted performance
Max drawdown & Time drawdowm
Profit factor
Model efficiency etc to decide whether the systems fits your psychology.
5) Optimise :
If the basic results look good, dig deeper.
-What if we exit at pre-defined profit instead of 3:15 pm ?
- Days suitable for the strategy ?
-Days when you should avoid the strategy ?
- High vix or low vix ?
Basically generate more insights.
6) Robustness & Stress Test
Check performance on black swan days
Check performance by removing outliers & max
Are trades evenly distributed ?
Consistent performance qtr by qtr, year by year,
Even dist. Of PnL ?
Also do walk forward testing.(Advanced topic so will explain later)
7) Track Real Time Performance
Start live execution with small qty before actualy deployment to get feel of the strategy.
Try to incorporate the feedback from live execution to further improve the strategy.
8) Deploy :
if the strategy passes all above steps then it’s fit for live deployment.
Deploy the strategty and monitor the real time performance.
The live performance should be similar to the backtest results.
9) Other important points
Make sure you avoid the following backtesting pitfalls and clean the data before backtesting.
1) I saw few tweets saying that this is the most difficult market ever.
As a trader, we have signed up for these risks & All we can do is be prepared & manage them
Lets have a look at days when markets action was crazier than current times !
2) 18th may 2009
Markets opened at 9:55 AM as this was the market opening time at that time
Nifty immediately hit an 20 % upper circuit at 10.01 am and the markets froze.
So markets were open only for 6 minutes.
3) 24th Aug 2015 (Vega Risk)
On 24th August 2015, the Indian markets declined close to 5.92%.
Nifty around 490 points but something unusual happened on that day.
Far otm Call options shot up inspite of such a huge fall😲
1) @sachin_rt is undoubtedly one of the greatest batsmen of all time & has played several amazing knocks. But one that stands out is his 241* at Sydney. He did not play a single cover drive in the entire innings
2) Look at his stance on the crease. Look at the balance. Perfect. Simply elegant. Looks so pleasing to the eye.
Even @bhogleharsha once said, “When Sachin hits a cover drive, the world seems all the more beautiful.”
3) But in the series against Australia. Sachin had been getting out by trying to drive the ball outside off.
He had scored just 88 runs in the previous three matches and had registered 2 ducks as well. So he decided that he needs to change something to score more runs
We have done this program at many large proprietary trading desks such as Futures First, KIFS Trade Capital, Marwari Shares etc and institutes like IIT-D, IIT-B,IIM-B, NMIMS,JBIMS to name a few.
So we surely have good credibility in the this domain :)