Introduction To Decoupling Method
Intraday day trading is divided into three types:
- 1. Stop loss Trading Technique: In this technique trader initiate one position keeping some stop loss and exit out of the position upon getting the stop loss triggered.
- 2. Swing Trading Technique: In this method trader initiate one position keeping some stop loss and at the point of stop loss reverse the trade keeping opposite view.
- 3. Decoupling Method: In this method trader identify the indices, stocks those are showing opposite behavior and assuming this behavior will continue or vanish after some time in a day then took the position.
The method of decoupling trading strategy is complex in its structure and bit complex in implementation too. However the success ratio is quite impressive.
Since Decoupling method is my own invention I will give some idea about this method in this article. When we talk about the decoupling the exact meaning is deviation or detachment.. for example if I choose two public sector bank stocks for my study assuming they have similar business vertical and market penetration ,I will conclude their stock price will exhibit similar behavior in a day. Provided no bad news, good news, result or any other external factors influence them.
At this junction if I want to study their pricing patterns in a day in order to identify existence of the decoupling then I can take the help of followings:
- A. If any one technical indicator is giving buy signal for one stock and sell for the other stock then I will say decoupling exists. This phenomenon is due to the run up or sharp correction in any one of these stock.
- B. I can take the help of past 10 trading days beta value to know the sensitivity of both the counters and study their intraday movement.
- C. I can take the help of Fibonacci Retracement to identify if it suggest buying in one counter and sell in the other.
- D. I can take the help of Gann method to identify the opposite trading view.
- E. I can take the implied volatility of at the money options of the stocks to find the decoupling in volatility.
After analyzing this phenomenon I will initiate trade in both the counters assuming this decoupling phenomenon will vanish at some point of the day.
Similar argument can be drawn for index and stock in that perticular index segment. For example if by the mean of some mathematical simulation if I will identify X % change in any of the stock brings Y% change in any of the index then the deviation in any of the day can be called as decupling.
Once we identify the decoupling then we need to investigate the cause of the decupling. If the cause is due to the trader´s temporary behavior or local in nature then we will use this opportunity as a trading opportunity. But keep in mind we are using this opportunity as a trading opportunity same time we are honoring the cause.
Using the beta as the mathematical factors I have simulated hundreds of trades in the stock futures and found the success of this method even in the critical days of sharp fall and raise. All about this method you can find on my book on masters key to future and options.
Some of my experiments on the future trade useing the beta decoupling strategy in the month of september and october 2009
25th sept 2009 1.sell sbi fut 1 lot at 2142 and buy icici fut 1 lt at 850 max loss Rs2k profit Rs3.5k beta hedge call- closed 1st october at Rs16000 profit
29th sept 2009 2.buy sbi fut 1 lt at 2149, sell icici bank fut 1 lt at 858 max loss Rs4.5k profit Rs4.5k intraday beta hedge call-lOSS TRIGGERED
30th sept 2009 3.buy hdfc bank 1 lt at 1606 and sell icici bk 1 lt at 868 max loss Rs4k profit Rs4k intrday beta hedge call-GIVEN PROFIT
buy hdfc bank fut at 1630 and sell icici bk fut at 894 max loss Rs7k profit Rs11k intraday beta hedge call -GIVEN PROFIT
You can make use of our beta hedge online calculator available under the calculator section of our web site to derive many interesting trade decission.This Calculator works all kind of World market. Do read the manual associated with the calculator to know more about the beta coefficient.