Trending or Directional Algo Strategy
These strategies are for demonstration purposes only and are not intended for actual trading. AlgoTest is not responsible for any profit or loss arising from the use of these sample strategies.
Directional or Trending Strategy Defined
A directional strategy is a trading approach where the trader profits when the market moves in one specific direction. In simple terms, traders using a directional strategy are essentially making a bet on the market moving either up or down. Consequently, if the market moves significantly, the trader stands to make money. These strategies typically have lower accuracy compared to non-directional strategies, but they offer a higher risk-to-reward ratio.
Meet AlgoTest
AlgoTest is an advanced platform for algorithmic trading. It allows traders to test trading strategies, simulate trades without using real money, and execute strategies accurately. This platform combines market complexity with user-friendly technology.
Pre-built Directional Strategy Template
Are you having trouble creating directional strategy? No need to worry. AlgoTest offers a pre built template to help you learn how to create a directional strategy and understand what a directional strategy looks like.
This sample strategy is provided by AlgoTest so that its users can use it as a guide to create their directional strategy.
Access Directional Strategy Template in AlgoTest
To get a sample of a directional strategy, just follow the straightforward steps outlined below.
- Create an account at https://algotest.in.
- Click on the saved strategy button as shown in the image below
- Click on Trending Strategy under sample strategy under #920 straddle as shown in the image below.
- It will show you a strategy as shown in the image below.
- You can backtest the strategy by clicking on the "start backtest" button as shown in the image below.
Logic Behind our Directional Strategy
Having a ready-made strategy is just the starting point for a trader. There is no one-size-fits-all strategy in the market, but each strategy comes with its own set of risks and rewards. It's crucial for a trader to fully understand the strengths and weaknesses of their strategy and how it performs under different market conditions.
To take advantage of one-sided price movement, we will use an option-selling strategy, which will give us profit when the market is in a one-sided trend. The market usually remains sideways most of the time, but once in a while, when prices move in one direction, it gives high risk to reward.
This is a directional option selling strategy. In this strategy, we will sell an At-The-Money (ATM) Call Option (CE) and an ATM Put Option (PE) at a specific time on a day with a small stop loss set at 20%. If the market trends in any direction, our one side will incur a small stop loss while the other side will yield a significant profit. This strategy is most effective on trending days.
Strategy Entry & Exit Conditions
First, we need to determine whether this is an intraday or positional strategy. This will be an intraday strategy to avoid overnight risk, so we will exit the strategy on the same day. Now, we need to select the index on which we want to trade. Although we have selected Nifty, you may choose any other index. Clearly defined :entry and exit rules are essential in trading.
Entry
We will sell an ATM Call Option and an ATM Put Option at a specific time of day. To determine the best time to do so, you can backtest your strategy at different times using AlgoTest. Market gives one sided moves usually in the morning, which is ideal for a directional strategy. Therefore, we have selected 9:17 AM as the entry time for our sample strategy. Based on this, we will sell the ATM Call and ATM Put at 9:17 AM. As this is an intraday strategy, we will also exit our positions at 03:15 on the same day.
We can add an ATM CE & ATM PE Leg from the leg builder by clicking on the Add Leg button.
Exit
To manage risk, we will set a stop loss of 20% on each Call Option (CE) and Put Option (PE) leg, so that we can exit our trades with minimal loss when the markets are against us.
Conclusion
There is no holy grail in the stock market. Every strategy we create has its pros and cons. No single strategy can guarantee profits every day. Therefore, it is always better to use the sample strategies provided by AlgoTest to get an idea and create your strategy based on your risk tolerance. You can try different permutations and combinations and backtest your strategy using AlgoTest to understand how it will perform in different market scenarios.