Updated: Jul 6
There are millions of Amibroker AFLs are present in the intraday trading community.
But most of the traders only look at ‘Success Ratio’ while developing most of the AFLs.
It is not a good idea. Because a trader can have a 90% success ratio, but still, he can lose money.
For example, Banknifty is trading at 30100. A person will suggest taking a long trade at CMP (at 30100), target 30200, and stop-loss 29000.
Do you know what will be the outcome of this trade?
On most days, these kinds of trades are winners because we are risking 1100 points for a profit of just 100 points!
One loss can wipe out the profits from 10 trades. Hence, day traders, along with ‘Success Ratio,’ should always look at another parameter, ‘Risk-Reward.’
Now assume we have a good trading system – Success ratio of 60%, Risk-reward of 1-2.
It means out of 100 trades, 60 trades are winners, and 40 trades are losers. In addition, if we risk 10K per trade, winning trades made a profit of 20K (RR or 1-2).
So all looks good on paper, right?
An intraday trader starts to use the above trading strategy and deploys 10 Lakh capital for this system.
After some trades, his portfolio reduces to 7 lakh (30% erosion). Do you think he will keep the same emotional stability to take trades using the same trading strategy?
Definitely, the answer is a big NO!
In the above case, if the maximum drawdown is only 10% (means capital erosion only up to 9 lakh), then the same trader is in a better condition to take the trades using the same trading concept.
Hence, three parameters are essential to measuring the performance of a trading system.
In this article, I will explain an intraday trading strategy for Banknifty.
Besides, I will also provide all the statistics (including success ratio, risk-reward, and maximum drawdown parameters).
However, an explanation of two crucial concepts is necessary before giving the trading strategy.
Day Structures in Banknifty
Market Profile identifies a few readable patterns in the daily time frame based on the level of participation of big players.
IB Range is the first one-hour range in the market after the market open. Based on IB range and price variation around IB range, Market Profile identifies six important day structures:
Normal Variation Day
Double Distribution Day
We will discuss only ‘Normal Variation Day’ as part of the Banknifty trading strategy.
(Please read ‘Intraday Trading using Market Profile’ if you want to know more about day structures)
Normal Variation Day
On Normal Variation Day, the IB range (1-hour range) will be medium.
The price will move outside of the IB range in any direction (either up or down).
This movement of price outside of the IB range (range extension) generally will be equal to the length of the price range in the IB.
For example, if the IB range is 150 points, the price will move outside IB approximately 150 points.
Normal Variation Day occurs because big players don’t participate in the open.
They will watch the market for some time, and then they enter after the formation of the IB range to create a range extension on any one side of the IB.