Edge Ratio of Nifty for Last 15 Years on Donchian Channel

Abstract

Quality entry in derivatives trading is essential element for long run success. Trading with an edge is what separates the professionals from the amateurs. Without an edge in games of chance, player will lose money in the long run. Many researchers believe that market is efficient and cannot be predicted or market behaves randomly so any entry strategy is as good as entering randomly in market. Index data of S&P CNX Nifty of National Stock Exchange from Jan 2000 to May 2014 was studied to find out the edge of a truly random entry and entry using 20 day Donchian channel.3588 trading days were considered in which Donchian channel generated 86 entry signals, 43 each for long and short. Edge of an entry system using 20 day Donchian channel on highly traded CNX Nifty futures for period of fifteen (15) years revealed that the system has an edge over the truly random entry.E20 for Donchian channel was 1.60 whereas for random entry, it was 1.08. E50 and E100 for Donchian channel was 1.27 and 1.25 respectively which was 1 and 0.99 respectively for truly random entry. The results clearly show that a truly random entry does not have edge at all whereas an entry near the breakouts or breakdowns has an edge. It is desirable for traders to find out the Edge of a strategy before its implementation. It will not only increase the chances of long run success but also give confidence while trading. Application of edge ratio for determining stoploss is mentioned in the study