While a human trader may be able to trade for a few hours everyday, a computerized trading program will be able to do it for the entire 24 hours without a break or a mistake.

This is the advantage of algo trading – also known as algorithmic trading and automated trading.

You may have read all about algorithmic trading in our concept guide on algo trading. Let us now move on to the steps you need to follow for algo trading.

For the sake of illustration, we use PHI 1 as our algo trading software.

 

What is PHI 1?

Many algorithmic trading software is available in the market with few features, which may or may not be required by all traders.

The key challenge that traders face is the need to use multiple tools and additional plug-ins to complete the trading process. There are no tools that offer a comprehensive solution to algorithmic trading.

A good algorithmic trading software is one that allows easy access to the market and broker data, supports multiple instruments as well as markets, allows creation and testing of any trading strategies, has a user-friendly interface, provides readily available reports, has a reliable architecture as well as efficient order management and execution capabilities.

Well, we just defined PHI 1—a unified algo trading platform that takes care of mundane tasks so traders can focus on trading only!

Steps to follow for algorithmic trading:

 

Step 1 – Screening

The first step to begin algo trading is to screen the markets to identify instruments like stocks or index instruments to trade-in.

PHI 1 makes this process easier by allowing you to scan and screen symbols on a customized basis.

Traders can do screening based on any arbitrary criteria, with parameters based on price/volume action, volume ranks, and more. Traders can also create custom screeners by providing any mathematical expression with PHI 1.

Step 2 – Charting

The next step after screening is charting.

Charting refers to the plotting of graphs or patterns of a symbol based on customized parameters/indicators.

Charting also makes it easy for the trader to compare two or more symbols or parameters and their performance over time.

PHI 1 comes with advanced charting features and offers more than 120 indicators for free. Intraday traders can also access real-time and historical charts with PHI 1.

Moreover, one can plot many indicators for live updates.

This allows for seamless analysis of multiple facets of a stock. PHI 1 also provides pre-integrated data for all symbols including equity, indices, futures, and options.

Step 3 – Strategy Creation

The next step is creating a trading strategy.

The trader needs to decide on the strategy for the selected symbol.

PHI 1 allows traders to automate their trading strategy easily. Traders can create any type of trading strategy with PHI 1, even if it is just an arbitrary idea. Unlike most other platforms, PHI 1 allows the creation of customized strategies even outside of templates.

With the Advanced Strategy Creator feature, the trader can create any strategy they can imagine—no restrictions apply. Further, PHI 1’s Multi-symbol Strategy Creator, the built-in data allows traders to monitor multiple symbols/time intervals/asset classes in a strategy to make trading decisions on one or more of them.

If you don’t know coding, PHI 1 has a form-based strategy creator as well. This can allow you to do algorithmic trading without coding!

PHI 1 also offers coding services which you can use to develop your strategy.

Step 4 – Testing

Backtesting and Scenario Grading

Once the strategy is created, it is imperative to test the strategy before implementing it.

PHI 1 enables bulk backtesting, an essential assessment to identify whether your strategy could perform in past scenarios, using historical data.

PHI 1 also offers a unique feature called scenario grading wherein you can get a score on your strategies in multiple market scenarios such as market crash and volatility, further adding to your confidence.

Simulation

Now that you’re done with back-testing and optimizing your strategy, it is recommended that you test your strategy in a simulated (virtual trading) environment.

This can give you a crystal clear picture of how your strategy will perform in the live market. You can identify any bugs or edge conditions that might be present in the strategy code and refine your code accordingly. It’s like trading in the real markets without using real money.

PHI 1 allows you to simulate trades or perform forward-testing so you can gain the confidence of trading with your strategies in the live market.

Step 5 – Execution/Deployment

This is where your strategy is finally put to work.

Automated trading allows easy execution when all your criteria are met. PHI 1 helps you seamlessly deploy and closely monitor your trades.

Moreover, with PHI 1’s multi-broker integration, you don’t have to be limited to a specific broker. The choice is yours. Even if one broker is having a downtime, you won’t miss a trade. Multiple brokers also help you get the best rates.

Step 6 – Monitoring

Once live, you need to monitor your trades, which can be quite cumbersome.

PHI 1provides traders a single dashboard to monitor trades by date interval, strategy, and time-frequency across markets, scrips, and brokers.

We hope we’ve taken away the hesitation you’ve always had for trying out algorithmic trading.

In fact, PHI 1 offers the algorithmic trading software for a free trial so you can experience the prowess of automated trading in full! You can also enjoy lifetime free features like charting and screening. Try PHI 1 today!

And if you’re still wary of algo trading, we can schedule a demo for you. Click to schedule a session.

What is the Straddle strategy in options?

Straddle strategy is an options trading strategy in which the trader buys both a call option as well as a put option of the same underlying asset or stock having the same expiry date and strike price.

Usually, traders use the straddle strategy when they are sure of a significant movement of the underlying stock’s price, but are unsure of the direction, i.e. whether the price will rise or fall significantly.

Thus, in this strategy, the trader will make a profit when the price or the underlying stock rises or falls by an amount that is more than the premium paid to buy call and put options.

The profit potential is unlimited as long as the price of the underlying stock moves significantly in either direction.

For example, consider a stock whose price is Rs. 10.

The trader is expecting a significant movement in the stock’s price within 15 days post its result on 1st February.

But, he/she is not sure if the market will take the result positively or negatively.

So, the trader goes for a straddle strategy, i.e., he/she buys call options and put options with expiry of 15th February and bets the price to rise above Rs. 12 or fall below Rs. 8.

Thus, in this way he/she will make a profit on any movement of the stock price beyond Rs. 2.

Looking at a straddle, a trader can know two things about the sentiment of the options market towards a particular stock. The first is that the market is expecting volatility in the price of the stock, and the second is the expected trading range of the stock’s price.

You can easily try this strategy on PHI 1 as shown below:

Step 1:
Open the Option Leg Builder on PHI 1.

Step 2:
Select the index or stock whose options you want to trade.

Step 3:
Select the expiry.

Step 4:
Select the option strike price.

Step 5:
Select PE (put option) in option type.

Step 6:
Add this position by clicking Add Position.

Step 7:
Keeping all other parameters the same, select CE (call option) in option type.

Step 8
Add this position by clicking ADD POSITION.

Voila! You have created the straddle strategy with the payoff chart.

You can save this strategy for the future as a template by clicking ‘Save strategy’.

Now, prior to deployment you may want to perform backtesting for your options strategies. You can avail free options backtesting with PHI 1.

You can also deploy your options strategy easily when your predefined criteria are met. This means no more staying glued to the screens for the right trading opportunity to come!

Make the most of automation with PHI 1!

Try for free today!

 

Watch our demo of how to test straddle strategy using PHI 1’s Options Trading feature: Watch Now!

Learn Basics, Strategies, Risk Evaluation, & Risk Management in Options Trading

Options can be great instruments for hedging and risk management. Options also open up a whole new world of trading strategies you can explore and use to make profits.

We’ve put together an options trading guide to help you get started.

Here’s what you will learn in this guide:

1. What are Options? 2. What are Call Options & Put Options? 3. What are the uses of Options? 4. How do Options work? 5. What are some Options Trading Strategies? 6. What is risk in Options and how is it measured? 7. What are some risk management strategies using Options? 8. How to effectively use leverage in Options Trading? 9. What are the pros and cons of options trading?

 

1. What are Options?

An option is a contract that gives the buyer the right (without the obligation) to buy or sell the underlying security or asset at a predetermined price (strike price) by a predetermined date (expiry).

Options belong to the derivatives segment, as their price is derived from the price of something else, which is the underlying asset or security.

 

2. What are Call and Put Options?

There are two types of Options – Call option and Put option

A call option means that the buyer of the call option has the right but not an obligation to buy the underlying security at the strike price.

A put option means that the buyer has the right but not an obligation to sell the underlying security at the strike price.

The four main actions traders can take with options are:

1. Buy call

2. Sell call

3. Buy put

4. Sell put

Similar to buying a stock, buying a call option gives a long position to the trader on the underlying security.

And similar to short selling a stock, selling a call option gives the trader a short position in the underlying security.

Buying a put option means the trader is taking a short position in the underlying security.

Selling a put means the trader is taking a long position in the underlying security.

These four scenarios are crucial to understanding Options Trading.

Buyers of options are known as holders and sellers are known as writers of options. The difference between holders and writers is:

1. Call holders and put holders do not have the obligation to buy or sell the underlying security/options. They have the choice whether they want to exercise their right. This limits the risk of holders to losing the premium spent to buy the options if the markets do not go their way.

2. Conversely, call writers and put writers must buy or sell if the option expires in the money. This is because the writers need to make good their promise to buy or sell. This shows us that writers usually are exposed to more risk, as they can lose much more than the premium paid for the options. Sometimes, the risk to writers is unlimited.

 

3. What are the uses of Options?

A. Speculation

Speculation is essentially betting on where the price of a security will go in the future.

If a trader thinks that the price of a security will go up within the next one month based on his analysis, he/she will either buy the stock or a call option to benefit from the price rise.

An option is a more attractive instrument, as it provides leverage (one only has to pay option premium and not the price of the underlying security) and costs significantly lesser than the stock.

B. Hedging

Options were invented for hedging.

Using options to hedge helps traders reduce risk at a lower cost.

For instance, if a trader invests in a security assuming that its price will increase, they can hedge their position by buying put options of the same underlying security.

Thus, if the price increases, they will earn as the security price rises. And if the price falls, they will minimize their losses by making money on the put options.

 

4. How do Options work?

Here are 3 factors you need to know to understand how options work:

Relative Value:

Options are used by traders to profit from determining the probability of future events.

If the probability of an event is high, the option that makes bets on the event happening is more expensive than that of an option of an event less likely to occur, i.e., an event whose probability is low.

Thus, for example, the call option’s price goes up as and when the underlying security’s price goes up. Thus, one must understand the relative value of options to trade in it.

Time Value:

The price of options depends on time.

Therefore, if the option would expire soon, its price would be lower than the option whose expiry is after a longer time period.

This is also because determining the probability of an event (in this case – price rise or price fall) becomes easier as the expiry date comes closer.

This means that options are a time-diminishing asset.

For instance, if one buys an option with a one-month expiry, and the price of the stock does not move, then the option’s value decreases with each passing day.

So, a one-month expiry option is cheaper than a three-month expiry option.

This is because the probability of a price move in your favor increases if the time available increases.

Volatility:

The more volatile the underlying stock’s price, the more is the price of the option.

This is because more volatility implies that the price can go either way with larger swings, thus making the possibility of price movement in either direction greater.

Here’s an illustration of how option pricing works:

Most of the time, traders choose to make money by trading their positions, so the option holders usually sell their options in the market.

Only ~10% of options are exercised, 60% are traded, and 30% expire.

 

5. How do traders use options? (Basic Options Strategies)

As we know, traders use options to either speculate, hedge their trades or simply trade to make profits. To make maximum profits, option traders use some strategies while trading.

Let us look at some strategies here:

1. Long Call

In this strategy, the trader goes long on a call, i.e., the trader buys call options expecting that the price of the underlying security will go up.

For instance, a trader buys a contract with 100 call options for an underlying security whose current price is Rs. 10.

The option price, say, is Rs. 2.

Therefore, the trader spends Rs. 200 for the contract.

The trader will be at a no-profit no loss position (at the money) when the security price reaches Rs. 12 (strike price).

As the security price increases over Rs.12, the trader will start making profits.

Thus, a long call can give unlimited profits to the trader, as the price of the underlying stock can increase infinitely.

If the stock price falls below Rs.12, then the trader may sell it off at a loss or let the option expire and lose Rs. 200 only.

Thus, this strategy has an unlimited upside and limited downside, which traders use when they are fairly certain of the increase in the underlying stock’s price.

2. Short Call

In this strategy, the trader sells a call option, expecting that the price of the underlying stock will decrease over a predetermined time frame.

Thus, the trader can make unlimited profits if the price of the underlying stock decreases.

However, the trader may face significant losses if the price of the underlying stock increases, as in that case, he/ she would have to purchase the stock at higher prices and deliver.

3. Covered Call

To protect against such losses, the trader goes for the covered call strategy.

This involves holding a long position in the underlying while shorting a call.

Here, since the trader already buys the underlying stock, they gain on the stock price if it increases and gain on the call option if it falls.

This strategy limits the losses and profits of the trader. Experienced traders usually use this strategy of covered calls to generate income from their stock holdings.

4. Long Put

This strategy is like that of a long call except that the trader buys put options instead of call options when they are fairly certain that the price of the underlying stock will fall below a certain level in a fixed time frame.

For example, if a trader buys a contract with 100 put options for an underlying stock whose price is Rs. 10 at a strike price of Rs. 8, they will be at a no profit no loss position (at the money) if the stock price falls to Rs. 8.

Thereafter, as the stock price falls further, the trader will be in the money, till the stock price reaches 0.

As the price of the underlying security cannot fall below zero, gains as well as losses are capped.

This is because if the price moves in the opposite direction, the trader can choose to let the options expire and suffer a loss of Rs. 200.

This strategy is used when the traders are fairly confident of the stock price falling below a certain level.

5. Short Put

In this strategy, the trader will write/ sell a put option, i.e., bet that the price of the underlying security will increase over a fixed time period.

Here, the maximum profit for the trader is limited to the premium amount collected.

But, the maximum losses can be unlimited because they will have to buy the underlying stock to fulfill their obligations to buyers if they decide to exercise their option.

This can be an effective strategy if the trader is fairly certain that the price of the underlying stock will increase.

The trader can also buy back the option when its price is close to being in the money and generate income through the premium collected.

These strategies would have seemed vague if you wouldn’t be able to see payoffs, right?

Well, here you go!

Now, let’s move on to understanding risk measurement in options and risk management strategies.

 

6. Risk Measurement in Options Trading

An option’s price can be influenced by several factors that can either help or hurt traders depending on the type of positions they have taken.

We need to understand the factors that influence options pricing, which are known as “Greeks”—a set of risk measures named after the Greek letters that denote them.

Greeks show how sensitive an option is to time-value decay, changes in volatility, and movements in the price of its underlying security.

These four primary Greek risk measures are known as an option’s Delta, Theta, Gamma and Vega.

An option’s “Greeks” describe its various risk parameters.

1. Delta is the measure of the change in an option’s price or premium resulting from a change in the underlying asset.

2. Theta measures its price decay as time passes.

3 Gamma measures the Delta’s rate of change over time as well as the rate of change in the underlying asset. Gamma helps forecast price moves in the underlying asset.

4. Vega measures the risk of changes in implied volatility or the expected volatility of the underlying asset price in the future.

 

7. Risk Management using Options

Options are used to offset risk when trading in the market. Using options to hedge helps traders reduce market risk at a lower cost.

Here, we will look at a few option trading strategies that traders use to minimize their risks:

1. Protective put or Married Put

In a protective put, the trader invests in a security assuming that its price will increase.

They also hedge their position by buying put options of the same underlying security.

Thus, if the price increases, they will earn as the security price rises. And if the price falls, they will minimize their losses by making money on the put options. This strategy limits the losses and profits of the trader.

The only downside to this strategy is that the trader has to let go of some gains as risk mitigation.

2. Covered call:

A covered call is used by traders who intend to hold the underlying stock for a long time, but do not expect a considerable rise in price in the near term.

Selling a call (covered call) protects against a fall in the stock price and thus hedges their position.

The maximum profit from a covered call is if the stock price rises to the strike price that has been sold. Thus, this strategy is not meant for very bearish or very bullish expectations.

These are the simple strategies for risk management in options. There are more complex option spreads too, which traders use to mitigate risk.

 

8. Using Leverage effectively in Options Trading:

Let us first understand what is leverage and how it relates to options trading.

There are two ways leverage is used in options trading.

A. Avoid: Using the same amount of capital to bet on a larger position

This means that 1 rupee invested in a stock and the same 1 rupee invested in an option does not equal the same risk.

Consider the following example. You’re planning to invest Rs.10,000 in an Rs.50 stock, but also have the option to buy options contracts worth Rs.10 as an alternative. After all, investing Rs.10,000 in a Rs. 10 option allows you to buy 10 contracts (one contract is worth 100 shares of stock) and control 1,000 shares. Meanwhile, Rs.10,000 in an Rs.50 stock will only buy 200 shares.

In this example, the options trade is riskier than the stock trade. With the stock trade, your entire investment can be lost, but only if the stock price falls 100% from Rs.50 to Rs.0.

However, you stand to lose your entire investment in the options trade if the stock drops to the strike price.

So, if the option strike price is Rs.40 (for an in-the-money option), the stock only needs to drop below by 20%, i.e., below Rs.40 by expiration for the entire investment to be lost.

B. Better: Maintaining the same position by spending less money

This is the definition of leverage that a consistently successful trader incorporates into his/her trades. Understanding the risk in this way of leverage is as explained below:

There is a huge risk disparity between owning the same amount of stocks and options. To understand this, let us examine two ways to balance risk disparity while keeping the positions equally profitable.

i. Conventional Risk Calculation

The first method to balance risk disparity is the standard and most popular way.

Let’s go back to our example to see how this works:

If you were going to invest Rs.10,000 in a Rs.50 stock, you would receive 200 shares. Instead of purchasing the 200 shares, you could also buy two call option contracts of 100 shares each at a considerably lower cost. By purchasing the options, you spend less money, but still control the same number of shares.

This excess money which you saved when buying an option can be used in other trading opportunities with greater diversification. Thus, this leveraging strategy can free up your funds for other trades.

ii. Alternative Risk Calculation

In this alternative risk strategy, the trader balances cost and quantity based on risk.

For example, if you buy a stock at Rs. 50, keeping a stop loss at Rs. 40.

You are ready to lose Rs. 10 in case the stock does not behave according to your expectations.

So, for these Rs. 10 you can buy a put option of the same underlying security with strike price Rs. 40.

What you can achieve with this strategy is that you can limit your loss to Rs. 10 in this trade. All other price movements, like above Rs.50 and below Rs. 40 will generate profits for the trader.

Thus, the trader needs to determine the right amount of money to invest in an options position, which allows the investor to unlock the power of leverage.

The key is managing risk while maintaining your exposure and profit probability.

Before we conclude, here are some advantages and disadvantages of option trading:

 

9. Pros and Cons of Options Trading:

 

Pros of Options Trading:

Options trading can be very helpful for traders. Some of them are listed below

1. Leveraging potential:

Options come with huge leveraging power. A trader can get an options position equal to a stock position at a much lower cost and margin, or at the same investment cost, the trader can control a much greater number of securities using options.

2. High Return Potential:

The returns on options trading would be much higher than buying shares on cash. This is because the trader can get options on lower margin and get the same profitability, hence, the percentage return on investment would be much higher comparatively.

3. Lowering Risk of Holding Underlying:

Options are surely riskier than owning equities, however; there are also times when options are used to mitigate risk. Options are used widely to hedge positions. The risk in options is pre-defined as the losing the premium paid to buy the option.

4. Risk Management in Options Trading:

There are more strategies which are used by regular traders to trade options along with trading equity. The trades can be combined to create a strategic position with the help of a call and put options to mitigate and control risk when trading in the market.

 

Cons of options trading:

As we have seen above, options can be highly rewarding. However, there are some drawbacks to options trading.

1. Less Liquidity:

Some stock options have lower liquidity, which makes it very difficult for a trader to enter and exit trades.

2. High Trading Costs:

Option trading is typically more expensive as compared to stock trading, as most full-service brokers charge higher fees for trading in options.

3. Time Decay:

The value of your option premium decreases by some percentages each day irrespective of movement in the underlying.

4. Non Availability of All Stock Options:

All the stocks registered with exchanges do not have options contracts. This makes it difficult for a trader to hedge his position with options strategies.

Wow! Looks like you’ve got it all ‘covered’!

Which platform would you prefer to try out these learnings?

We’d say a platform that offers not just free and accurate F&O data but also allows you to see payoffs, try out any options trading strategy, backtest and simulate it, and all this while placing your trade with a broker of your choice!

Image caption: Here’s a married put example while the trader is holding Axis Bank shares and how easy PHI 1 makes trading options.

Add to this, our robust support and resources section!

Get more from Option Trading with PHI 1.

Simply visit app.phi1.io for a free trial and choose a plan that suits you if you like us.

Traders usually combine a variety of technical indicators to come up with trading ideas and strategies to execute a trade profitably. That said, some tried and tested trading strategies can always be deployed to make some quick trades.

All you need to do is insert the parameters into an automated trading system like PHI 1.

You can even paper test these strategies before you actually start placing trades with real money.

Let us look at some popular trading strategies you can use now on PHI 1:

 

I. Moving average strategies

1. Price Crossover – Whenever the price of security crosses the moving average line, traders take it as a signal of a change in trend.

For example, if the price crosses above the moving average line, it depicts a positive trend and when the price crosses below the moving average line, it depicts a negative trend.

Using MA in Form-based Strategy Creator on PHI 1

MA Strategy Testing Results on PHI 1

MA Charts on PHI 1

2. Two moving averages – In this strategy, 2 moving average lines are plotted on the chart, one longer moving average and another shorter moving average.

The traders recognize it as a positive trend or a buy signal when the shorter moving average line crosses above the longer moving average line. This is the golden cross.

For example, when the short-term moving average (50 SMA) passes above the long-term moving average (100 SMA).

After the formation of the golden cross, the price of stock has increased gradually. Therefore, we can say that it is a good time for the trader to buy the stock.

When the shorter moving average line crosses below the longer moving average line, traders recognize it as a negative trend or a sell signal. This is the death cross.

For example, the death cross forms when the short-term moving average (50 SMA) crosses below the long-term moving average (100 SMA).

After the formation of the death cross, the price of the stock declines sharply. Therefore, we can say that most of the time, the death cross shows that there is the potential of a massive sell-off.

Using 2 MA in Form-based Strategy Creator on PHI 1

Strategy with 2 MA Testing Results on PHI 1

 

II. Average Directional Index strategies

The strength and direction of a trend is measured by the average directional index or ADX. It consists of 3 lines on the indicator – ADX, +DI and –DI.

It is considered that when the +DI line crosses the –DI line while the ADX is above 25, traders see it as a signal that an uptrend is about to start, and they could consider entering a long position.

On the other hand, if the –DI line crosses the +DI line while the ADX is above 25, traders can take it as a signal that a downtrend is imminent, and there is an opportunity to enter a short position.

 

III. On-Balance Volume strategies

As is well-known, on-balance volume indicators are used to depict the positive or negative flow of volume in the traded security over a fixed period.

Up volume is the volume of a security traded on the day when the price of the security has rallied, and down volume is the volume of security traded on the day when the price of the security has fallen.

We get the on-balance volume of the day by adding or subtracting the day’s volume from the indicator if the price goes higher or lower, respectively.

When on-balance volume rises, it depicts that there are more buyers and pricing is being pushed higher, whereas if on-balance volume falls, it shows that there are more sellers than buyers, thus pricing will be pushed down.

In case the price and the on-balance volume indicator go in different directions like the price rising but the on-balance indicator falling, the rising prices are not supported by buyers in the market, and the upward trend could reverse.

 

IV. Accumulation/Distribution Line strategies

A/D line considers the closing price of the security as well as the trading range for the trading period.

Traders view the A/D line trending upwards as buying interest in the security, and thus, infer an uptrend in the security’s price. And if the A/D line is falling, it depicts a fall in volume and thus infer a downtrend.

Also, if the A/D line and the price of the security moves in different directions, it signals a reversal of trend.

 

V. Relative Strength Index (RSI) strategies

The relative strength index (RSI) moves between 0 and 100, as per price gain or price loss of the security. The traders could thus understand the momentum and strength of the trend using RSI.

Also, some traders consider RSI above 70 as an indicator of the security being overbought and thus expect a negative trend. This indicates an exit point.

An RSI below 30 is understood as the security being oversold and thus signaling an upward trend and an entry point for a long position.

When RSI is moving in the opposite direction of the price, it signals a weakening of the price trend which could reverse, eventually.

Using RSI in Code Mode Strategy Creator on PHI 1

RSI Strategy Testing Results on PHI 1

 

VI. Aroon Oscillator strategies

This indicator is used to determine if the price of the security is reaching new highs or lows over the time for which it is calculated.

There are 2 lines in this indicator – Aroon up line and Aroon down line.

When the Aroon up line crosses above the Aroon down line and the up line reaches near the 100 level and the down line remains near 0 levels, traders infer a positive uptrend and vice versa.

 

VII. Moving Average Convergence Divergence (MACD)

The moving average convergence divergence (MACD) is used by traders to ascertain the trend direction and the trend momentum.

When the MACD rises over zero, the price is believed to be in an upward trend and as the MACD goes below zero; the price is in a downward trend.

Also, if the MACD line crosses above the signal line, traders depict a price uptrend, and vice versa.

Both these methods are used together by traders.

Thus, if the MACD is below zero and MACD crosses below the signal line, one may enter a short trade and vice versa.

 

VIII. Stochastic Oscillator strategies

A stochastic oscillator is used to measure the current price of a security relative to a price range over other periods. It is plotted between 0 and 100.

It shows that when an uptrend is on; the price makes new highs and in case of a downtrend; the price makes new lows.

Also, when the stochastic oscillator is above 80, the security is overbought and if it is below 20, then it is considered being oversold.

You can easily try these strategies on PHI 1.

PHI 1’s Form-Based Strategy Creator is super easy to use. All you need to do is choose the indicator, add criteria and values, and hit Run and Save. Your trade is executed when the requisite criteria are met.

PHI 1’s automated trading aims to make life easy so you can trade better. Explore its unique features on app.phi1.io.

Try these strategies on PHI 1 for free.

 

Disclaimer: The purpose of sharing these strategies is purely educational. Please do not consider these for investment purposes.

We’ve discussed indicators and trends as well as popular trading strategies using technical indicators in our previous articles. In this blog, we discuss the most popular stock chart patterns for trading.

Chart patterns are essentially shapes formed on trading charts, which may help identify price action signals like reversals and breakouts.

Over the years, several stock chart patterns have been widely recognized. Using these chart patterns can give your trading an edge by allowing you to confirm a specific signal or trend.

Whether or not you’re new to stock patterns, it’s time to familiarize and refresh yourself with these 8 popular chart patterns.

1. Head and shoulders pattern:

This pattern forms when a stock’s price increases and reaches a certain level and then comes back to the base from where it started earlier.

After this, it again starts rising and crosses the previous peak, reaches a new high price, and then declines to reach the base.

Finally, the stock price again rises but goes only to the level of the first peak. Then, it falls, and while declining, if it breaks the established baseline with a reasonable volume, the bearish reversal occurs.

Source: https://traders-paradise.com/magazine/2020/05/head-and-shoulders-pattern-how-to-trade/

2. Double Top:

This is a bearish reversal chart pattern that is formed when a stock is on an uptrend for some time.

The stock’s price increases and reaches a level and declines to the support after creating a peak.

This support level is called the neckline.

It rises after getting to the neckline, reaches the previous level, and forms a peak.

Finally, the formation of this pattern completes when the price comes back to the neckline after creating the second peak. If the price breaks through the neckline while retracing back, it confirms a bearish trend reversal. 

Source: https://howtotradeblog.com/what-is-double-top-pattern/

3. Double Bottom:

This is a bullish reversal trading pattern comprising two lows below a resistance level referred to as the neckline.

The price will hit the first low just after the bearish trend. However, it stops at this level and retraces back to the neckline.

After hitting the neckline, the price rebounds and enters a bearish trend, reaching a price almost the same as the previous low.

Finally, the price again starts increasing and comes to the neckline. Further, if this bullish trend breaks the neckline and continues moving upwards, it confirms the uptrend.

Source: https://dailypriceaction.com/forex-beginners/double-bottom-pattern/

4. Rounding bottom:

This pattern shows a bullish upward trend and can be divided into three parts.

First, excess supply forces the stock price to go down, thus forming the declining slope of a rounding bottom.

The transition to an upward trend occurs when buyers enter the trade after seeing the stock at a low price, thus increasing the demand for the stock.

After completing the rounding bottom, the stock’s price breaks the resistance line and continues the uptrend. The trading volume is less at the lowest point of the chart and high at the decline and when the stock price reaches its previous high.

Source: https://www.centralcharts.com/en/gm/1-learn/7-technical-analysis/27-chart-patterns/518-rounding-bottom

5. Cup and handle pattern

This pattern shows a bullish market trend after a pullback.

It features a rounding bottom followed by a handle-like consolidation, which might look like a pennant, wedge, or a smaller rounding bottom followed by a solid upward trend after that.

The breakout towards the upward trend must be confirmed by a substantial volume above the handle’s resistance, or it might come out to be a fake breakout.

The limitation of this pattern is that it takes a longer duration to form, leading to late decisions. Further, sometimes a very shallow cup can be a signal, whereas other times, even a deep cup can be a false signal.

Source: https://www.elearnmarkets.com/school/units/chart-patterns/cup-and-handle

6. Wedges:

This pattern is formed by converging trend lines on the chart.

Two trend lines are generated by connecting the highs and lows of the price of a stock over a period.

Highs and lows either rise or fall at a different rate, resulting in a wedge-like appearance.

Wedge patterns are primarily used for forecasting price reversals and can signal both bullish or bearish price reversals.

There are three standard features in both cases: converging trend lines, a decline in volume with the price progression, and finally, a breakout from one of the trend lines.

The two types of wedge patterns that form are the rising wedge and the falling wedge.

Rising wedge patterns result in a decline in stock prices after the breakout at the lower trend line.

This offers an opportunity for short-selling.

In the case of falling wedges, price breaks the upper trend line, and the stock price reverses and trends higher. This provides an opportunity for entering a long position.

Source: https://www.dailyfx.com/education/technical-analysis-chart-patterns/rising-wedge.html

Source: https://www.dailyfx.com/education/technical-analysis-chart-patterns/rising-wedge.html

7. Pennants and flags:

Flags are consolidation phases where the trend lines are parallel to each other.

This pattern is formed by a sharp counter-trend (flag), which is succeeded by a short-lived trend (flag’s pole).

This pattern is primarily used in combination with volume indicators and signifies trend reversal or breakouts after consolidation.

Pennants are identical to flags in their implications, but the trend lines converge instead of being parallel in pennants. Further, it’s crucial to observe the volume in a pennant. Volume should be low during consolidation, whereas during the breakouts, it should be on the higher side.

Source: https://www.dailyfx.com/education/technical-analysis-chart-patterns/pennant-pattern.htm

Source: https://forextraininggroup.com/trade-bearish-bullish-flag-patterns-like-pro/

8. Triangles:

Perhaps one of the most commonly used patterns is triangles – ascending, descending, and symmetrical. Go to our blog post to read up on the triangle pattern.

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