1. Stop Loss Trading Technique
Trader initiates a position with a predefined stop loss and exits when triggered.
2. Swing Trading Technique
Trader initiates a position with stop loss, but reverses the trade if stop loss is hit.
3. Decoupling Method
Identifies indices/stocks showing opposite behavior, capitalizing on temporary divergences that may converge later in the day.
The decoupling trading strategy is complex in structure and implementation, but offers impressive success rates when executed properly.
Decoupling refers to deviation or detachment in price behavior. For example, two similar public sector bank stocks should exhibit comparable price movements unless influenced by external factors.
After identifying decoupling, traders initiate positions in both counters, anticipating the divergence will correct itself during the trading day.
This approach also applies to index-stock relationships. Mathematical simulations can establish expected correlations, with deviations representing decoupling opportunities.
Always investigate the cause of decoupling. Only trade temporary, behavior-driven divergences rather than those caused by fundamental factors.
Beta-Based Decoupling Trade Examples (Sept-Oct 2009)
25 Sept 2009: Sell SBI fut @2142 + Buy ICICI fut @850
Max loss: ₹2,000 | Max profit: ₹3,500
Closed 1 Oct: ₹16,000 profit
29 Sept 2009: Buy SBI fut @2149 + Sell ICICI fut @858
Max loss: ₹4,500 | Max profit: ₹4,500
Loss triggered
30 Sept 2009: Buy HDFC Bank @1606 + Sell ICICI Bank @868
Max loss: ₹4,000 | Max profit: ₹4,000
Profit achieved
30 Sept 2009: Buy HDFC Bank @1630 + Sell ICICI Bank @894
Max loss: ₹7,000 | Max profit: ₹11,000
Profit achieved
For more detailed strategies and calculations, use our Beta Hedge Online Calculator (works for all global markets) and read the accompanying manual.
Complete methodology explained in my book: Master Key to Futures and Options.
