Here you go..WOD, Thinking like novice trader /any other person in the market (not blaming you but thats how we are tuned to think thru our normal life).
Why don't look at the opportunity that the gap is offering you. If you remember one of Sunil's earlier post on NR7, he mentioned that most of juice of NRx breakout is gone due to the opening gap which is true. Yes, taking a directional call on NRx day and anticipating the breakout direction and holding futures position is risky.. but there are low risk approach to benefit from this (using strangle/ straddle - either long or short ). I like to catch that breakout gap which is shown by NR setup.. rather then running away from it. I did burn myself couple of time by lack of low risk strategy till I backtested
and finally boiled down to Straddle/strangle.
Let me share part of my study on nifty gaps.
- Max size of gap that we saw on NF is -7.2% on down side and 6.7% on upside. (thats scarry, isn't it)
- Average size of gap is 0.03%
- Standard deviation of gap is 1.9%. Sorry to bring in Statistics here.. but thats how trader need to think (in my view)
- 1 Std Dev range from average give us the min of -1.9% to max of 2% . In simple terms, 70% of the time, statistically, we will gap within +/-2% of NF value.
- 2 Std Dev range from average give us the min of -3.8% to max of 3.9% . In simple terms, 95% of the time, statistically, we will gap within +/-4% of NF value.
That means, 70% of time, +/- 2% will be the gap size, 30% of time it can be beyond this range.. When it goes out of 2% range, it will be within 4% size for next 25% time.
So only 5% of the time, it goes to that scarry limit of >4%.. not everyday dear.
So we got to face the reality.. and trade probablities..
With this logic, 70% chance is that tomorrows market may give us gap within 90 points.
That is not unlimited risk, it is 50*90 = 4500 rs of risk per NF contract.
If our account does not permit that then forget it.. else you can keep the position open.. (we anyway take 4500 rs of risk during intraday).
(plz take last 2 month NF data and chk the gap size yourself for these ranges and post your findings here)
Yes, It can go beyond 90 points tomorrow.. but 95% chance is that it will be within 4% i.e 180 i.e. 95% chance that max we will loose by overnight trade is 180*50 = 9k.
Again, if account size doesn't permit that, then forget it.. else take the risk..what is so different.. If you are trading multiple contract, then certainly you can reduce the number of contracts and bring the risk within limit and can leave it open overnight.
Hope this give u idea about thinking probabilities. Thats where the importance of Risk per trade / risk per position starts coming into picture.
If hit of 9000 or 4500 Rs is just 1% of your account then this is as good as taking 1% risk on a intraday trade..
Just need different mindset to think it..
We are in the business of taming the beast called RISK. So start loving it and find out the ways to manage it.
Thats how I think as a trader.. Will appreciate feedback on it ..
Happy Trading
