I have a been an ardent follower of Mumbai Indians since the launch of IPL in year 2008. I Followed similar tradition of watching every MI match this year too. But, this time the team is right at the bottom of the points table.
As a fan, I was very disappointed. Seeing me disappointed, my colleague gave me an interesting idea to find the moment of stock market during IPL and if there is any pattern that is emerging which can then be used by us traders to make money.
For this analysis, I have taken the data from 2011 to 2020. I haven’t considered year 2021 as the complete season was broken up into two different months.
Season-wise Performance of Nifty
Lets first have a look at the returns that Nifty gave during each IPL season. The returns have been calculated based on the Nifty Index data considering the start date and end date of the IPL season
As you can see from the chart, Nifty has given positive returns 60% of the times and negative returns 40% of the times. But, this does not show how much has the nifty moved since this has only the open and the close of IPL start date and IPL end date respectively.
So, to get the complete picture, we will take the open, high, low and close price of the nifty right from the IPL start date to IPL end date. But, seeing these values based on absolute values won’t make any sense, so we will convert it to % from Open price. Let’s have a look at the data now.
Now, let us also have a look at the individual year-wise nifty moments throughout the years to get the better idea of any pattern formation.
By looking at all the above data, we can conclude the following:
- The market is rarely sideways during the entire IPL season
- 8 out of 10 times, the market has been trending in a single direction
The Strategy
Let’s make use of this trending behavior and try to formulate a strategy (I may be overfitting the past data, but let’s see how it goes) based on it.
Entry Criteria
- If Nifty is above 200 DMA at the start of IPL Season, go long.
- If Nifty is below 200 DMA at the start of IPL Season, go short.
Exit Criteria
- If you are long, Stop and reverse the trade when Nifty closes below 200 DMA
- If you are short, Stop and reverse the trade when Nifty closes above 200 DMA
Year-wise PNL of this strategy
So, we ended up losing on this strategy. Let’s have a closer look at the PNL. As you can see here, in season 2015 and 2016, we lost a lot of Nifty points as the market was sideways in both these years and we ended up taking too many trades according to our strategy.
Thus, we should manage our risks better and try to reduce these losses. One way, we can reduce loss in these years is to limit the total number of trades to 3 and maximum stoploss to be 300 points. If any of this conditions meet, we stop trading for the entire season.
Now, let us have a look at the PNL.
Managing the risks better by having a strict stoploss makes sure the losses are limited. The final PNL is about 1579 points and our hit ratio is 60% in the last 10 years.
Should we trade this strategy?
If you carefully look at the new PNL, more than 70% of the overall profit came in the year 2020. Well, that is one of the drawbacks of this strategy. A good trading strategy has profits evenly distributed and a single trade never accounts for such large portion of overall profit.
So, it is never a good idea to trade this strategy. Usse badhiya Dream 11 pe team bana lo 😂
Just Kidding!
On a serious note, we know that 80% of the times, the moment of Nifty is mostly trending so we can play with Long Straddles to make use of this trending behavior on either side.
Until then!
