DR.JIGNESH C. SHAH.

DATE-25-01-2020, SATURDAY.
  I am not a subject expert.
 Whatever I am going to share today is out of
my experience.
 There is no system in market which works
100% of time. Every system has its own
advantage and limitations.
 For success in trading money and mind
management equally important along with
systemic rules based trading.

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  Trading is very complex and it’s a path of
uncertainty.
 So you need some guide or navigator.
 Trading system or rules based strategy helps
you as guide or navigator to take fast
decisions in this complex trading business.

 We need to have a system which helps us in

taking decisions on direction of trade(Long or
short), position sizing and entry and exit
rules.

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  R for Rsi.(Relative
strength indicator)
 DX for aDX.(Average
directional index)

 RSI is momentum
indicator and ADX is
trend indicator.
 Combining momentum
and trend indicator can
gives us EDGE in trading
decision making process.
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  We have three parts in RDX strategy.
 BIAS
 MOMENTUM
 TREND

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 We need to have clear BIAS in
our mind for initiation of
trade.

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  BIAS is the first point of decision making
process.

 BIAS can be
 LONG
 SHORT
 NEUTRAL

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  LONG BIAS WHEN RSI IS ABOVE 55.

 SHORT BIAS WHEN RSI BELOW 45.

 NEUTRAL BIAS WHEN RSI IS BETWEEN 45&55.

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  SBI WEEKLY CHART– NEUTRAL BIAS
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  I WILL NOT TAKE LONG POSITIONS WHEN RSI
IS BELOW 45.

 I WILL NOT TAKE SHORT POSITION WHEN RSI

IS ABOVE 55.

 I will make investment based decisions above

55 RSI only.

 I will not hold my investment below 45 RSI.

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 SECOND POINT OF DECISION
MAKING PROCESS FOR
EXPOSURE

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  I have taken decision to go long or short…but
how much to take exposure?
 Can I buy options?
 Should I write options?
 Can I buy future lot?
 Can I make short term investsment?
 Can I make long term investment?
 Should I book profit/loss in my investment?

SO MANY QUESTION…ANSWER IS IN MOMENTUM.

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 MOMENTUM CAN BE
 MILD
 MODERATE
 STRONG
 VERY STRONG

MOMENTUM WILL BE
 LONG MOMENTUM
 OR SHORT MOMENTUM

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 LONG MOMENTUM CAN BE
 MILD—When RSI 55 to 60
 MODERATE– When RSI 60 to 65
 STRONG– When RSI 65 to 70
 VERY STRONG– When RSI above 70

So exposure in the position should be as per

momentum.

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  Mild long momentum– 25% positions.
 Moderate long momentum-50% positions.
 Strong long momentum-75% positions.
 Very strong momentum—100% positions.

We can understand same logic with RSI SCORE.

 Score 1 means Mild long—55-60
 Score 2 means Moderate long-- 60-65
 Score 3 means strong long—65-70
 Score 4 means very strong long—above 70.

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  RSI 63

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  RSI 80

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  RSI 68

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  RSI 58

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  CALL OPTION BUYING ONLY WHEN LONG
MOMENTUM STRONG OR VERY STRONG.
Means RSI above 65 or above 70.
Means RSI score 3 or 4.

 PUT OPTION SELLING(WRITING) AS PER LONG

MOMENTUM.
Means 25% positions in mild(score 1)
50% positions in moderate(score 2)
75% in strong (score 3)
100% in very strong (score 4)

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  HEDGING CALL OPTION SELLING ONLY When
long momentum is mild or moderate means
score 1 or 2 (RSI 55 to 65).

 No hedged call option selling above RSI 65.

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  FUTURE LONG BUYING advisable in strong or
very strong momentum only.

 Can be done in moderate momentum if adx is

also rising.

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  Short term investment should be done only
on basis of Daily charts.

 And long term investment on basis of weekly

charts.

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  FOR WEEKLY OPTIONS… 15 MINUTES CHARTS

 FOR FUTURES AND VERY SHORT TERM

INVESTMENT…HOURLY CHART BETTER.

 FOR DELIVERY BASED SHORT TERM

INVESTMENT…DAILY CHART

 FOR LONG TERM INVESTMENT… WEEKLY

CHART.

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  ALWAYS SEE THAT RSI IN YOUR TIMEFRAMES
SHOULD BE HIGHER THEN NEXT TIMEFRAME.

 Means for 15 minutes..it should be higher

then hourly for proper momentum setup.
 Hourly> daily.
 Daily>weekly.
 Weekly>monthly.

 This is preferred setup but not thumb rule.

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 SHORT SIDE MOMENTUM CAN ALSO BE
 Mild—RSI 40 to 45—Score -1
 Moderate—RSI 35 to 40– Score -2
 Strong—RSI 30 to 35—Score -3
 Very strong—RSI below 30—Score -4.

Exposure accordingly should be

25%(Mild), 50%(moderate), 75%(strong) or Very
strong(100%)

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  Always keep in mind that Put option buying
give better returns then call option buying
given similar conditions…because of
increased implied volatility.
 Put option buying should be done when short
side momentum strong or very strong(means
RSI below 35).
 Call option writing as per short side
momentum from 25% to 100%.

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  If you are selling puts for hedging against call
option writing positions… then it should be
done upto 40 RSI only.
 No hedged put option selling below 40 RSI.

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  FUTURE SHORT position should done in
strong or very strong short side momentum.
(RSI below 35 or 30)

 Keep in mind that short side cycles are fast

and short lasting. So quick booking of profit
is essential.

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  If you are short term investor then do not
keep holding of your stock when RSI sustains
below 45 in daily chart.

 Long term investors should keep watch on

RSI 45 in weekly charts.

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 Third important point in our
decision making process is
trend confirmation.

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  RSI (momentum) is gear and ADX (trend) is
accelerator.

 Here we need to develop observational skill.

 We need to identify that ADX is rising or not.

 By experience we can understood that Rising

ADX gives support to momentum and falling
or flat ADX leads to lackluster momentum.

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  So third point of decision making is based on
ADX.
 If ADX rising then underlying is Trending
 ADX falling then underlying is Non-Trending.

 Rising ADX with Long Bias means UPTREND.

 Rising ADX with Short Bias means
DOWNTREND.

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  ADX score.
 Uptrend means plus 1and Downtrend means
minus 1.
 So for exposure in trades… we have to add
AXre in our momentum score and accordingly
we can take positions.
 Please keep in mind..
 In uptrend DMI plus should be above ADX
and DMI minus should be below ADX.
 Same way in downtrend DMI- should be
above ADX and DMI+ should be below ADX.

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  For momentum based trading, like
1)future long or short
2)option buying and
3)Directional option writing
rising adx gives better returns.

 Maximum money making opportunity when

RDX score +5 or -5 but here we have to
strictly follow exit criteria.

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  When we are following trading system then it
does not work on fixed target or stoploss.

 Because decisions are process driven and not

fixed target oriented.
 Just like driving…you need to increase/decrease
speed depends on the traffic.
 As we are taking decisions based on
momentum… increase or decrease in positions
as per change in momentum is required.

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  Exit criteria when we reached +5

 1) RSI goes below 70

 2)DMI plus goes below ADX
 3)price reaches 13 moving average.

Exit criteria when we reach -5

1)RSI goes above 30
2) DMI minus goes below ADX
3)Price reaches 13 moving average.

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 FUTURE
OPTION BUYING
OPTION WRITING

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 • While trading options…we need to keep this in mind that around
75% options expires at zero.
• This simple statistics gives an edge to option writer then to option
buyer.

• Second point…Theta decay…which we discussed earlier also gives

simple edge to option writer then to option buyer.

• Loss can be unlimited for option writer and not for option buyer is
an edge for option buyer.
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  Most dangerous trading of all is future trading.
 Maximum money people are loosing in future
trading because its highly leveraged product.
 There is no scope for firefighting or adjustments
once you are trapped which is there in options
writing.
 Once you book profit in your future trade…you
can not make reentry…in options its very easy…
once you book profit in one strike price..take
entry in second srike price.(option buying and
selling both)

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  Probability of profit is 50% in future trading.

 But by human psychology…traders book early

there profit making trades and keep open loss
making positions(rollover) which makes
probability of profit significantly down.

 Premium erosion works like theta decay.

 Biggest reason traders prefer future trading is

they are addicted to price action…and have big
targets from trading income.

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 Depends on factors like
 In the money/ATM or out of money
 Implied volatility
 Time to expiration
 Premium paid to be reduced from probable
target
 Movement in underlying in direction of option
buying.

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  For option buyers, probability of profit is 50%
in ITM or ATM options but less than 25% in
OTM options.
 Volatility or uncertainity is friend of option
buyers.
 More the time to expiry higher are the
chances of success in option buying

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  Premium paid to buy options need to be
reduced from the profit..if your underlying
closed in your favour at expiry.
 And most importantly movement of
underlying should in your favour….
 Even no movement is also your enemy.

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  Probability of profit
 In future trading around 50%,
 In In the money or at the money option
buying… it is 50%
 In out of money options buying..it is 25%

 But….. in options writing it is 70 to 75%

In any of trading if you have a probability of

more then 65%...half battle already won.

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  Just check the successful traders currently on
twitter…Miteshbhai, Jagan, P R sundar, Ronak
unadkat, Pathik patel… what is common
between them? They all are options writers..
 Give me one example..who is successful
trader and trade only in futures?

 Options is a depreciating asset.

 If we can mix option writing with technical
system then it becomes a deadly combo.

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  In option buying…Entry is very much
important… wait for proper momentum setup
to develop…then only buy the option.
 In options writing… maxium choice to enter
the trade but fast exit from loss making trade
is very essential.
 Option trading in green are good to buy and
option trading in red are good to write…keep
this additional point in mind.
 Never allow your option writing position to
become in the money.

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  If you are trading only on basis of derivatives
data and not on technical sytem then you
have to trade complex strtegies where you
have to think of all probabilities and design
your sytem accordingly.

 When you are trading manly on technical

system then comlex strategies are not
needed.

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 CONTACT ME: Telegram: t.me/bankniftydoctor
Twitter: @niftydoctor

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