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A Study of Key Technical Indicators for Effective and Profitable Strategy in

Option Trading of Nifty

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Bhaskar Vijayrao Patil Deepali Gala

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A Study of Key Technical Indicators for Effective and Profitable

Strategy in Option Trading of Nifty

Dr. Bhaskar V. Patil#1 Dr. Deepali M. Gala#2

#1
Bharati Vidyapeeth (Deemed To Be University), Institute of Management, Kolhapur [M.S.],
INDIA.
#2
Bharati Vidyapeeth (Deemed To Be University), Institute of Management, Kolhapur [M.S.],
INDIA.
#1
bhaskarpatil2881@gmail.com
#2
deepaligala19@gmail.com

Abstract- Investors and traders are constantly on the lookout for profitable stock market
trading strategies. They use technical analysis tools of nifty to predict price changes.
Technical metrics, both lagging and leading, are used to obtain an advantage when
making investment or trading decisions. The trading rules are employed based on
analysing historical market data in order to identify the patterns. In this paper, studies of
key Technical indicator like Supertrend and Relative Strength Index (RSI) with the
parameter for both successful and profitable strategy to trade in Nifty.

Keywords: Technical Indicator, Supertrend, Relative Strength Index, RSI, Option Trading

I. Introduction
In the stock market, there are a variety of option trading strategies that can provide
traders with the right indications (entry and exit prices) at the right time. Traders and
investors face a difficult challenge in accurately predicting strike rates. The movement of
option prices is determined by economic, social, political, and psychological factors. The
following methods can be used to forecast or estimate option prices: fundamental
analysis, technical analysis, and time series forecasting. Each method has its own set of
advantages and disadvantages.
A technical trading strategy is made up of a collection of trading rules for generating
trading signals. A simple trading system usually has one or two parameters for varying the
timing of trading signals. The results of the parameterizations are the trading rules found
in a system. Technical research assumes that stock prices follow patterns determined by
investors' continuously shifting perceptions in response to various forces. Technical
analysis is based on the idea that history repeats itself and that past prices can be used to
predict future market direction.

II. Overview of Option and the Stock Market

Option is a financial instrument whose value depends upon the value of the
underlying assets. Option itself has no value without underlying assets. Option gives the
right to the buyer either to sell or to buy the specified underlying assets for a particular
price (Exercise / Strike price) on or before a particular date (expiration date). If the right is
to buy, it is known as “call option” and if the right is to sell, it is called as “put option”.
The buyer of the option has the right but no obligation either to buy or to sell. The option
buyer has to exercise the option on or before the expiration date, otherwise, the option
expires automatically at the end of the expiration date. Hence, options are also known as
contingent claims.
Options can be used in a variety of ways to profit from a rise or fall in the underlying
asset market. The most basic strategies employ put and call options as a low capital means
of garnering a profit on market movements, known as leveraging.

III. Key Technical Indicator for Effective and Profitable Strategy

A technical indicator is a series of data points that are derived by applying a formula to
the price data of the stock. Technical indicators provide unique perspective on the

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strength and direction of the price action of the strike price of option. Indicators serve
three main functions: to alert, to confirm and to predict. There are hundreds of indicators
in use today. We are focusing on Supertrend indicator and Relative Strength Index
applying for NIFTY indices in this paper.

3.1 Supertrend Indicator

As the name suggests, ‘Supertrend’ is a trend-following indicator plotted on prices. It
is easy to use and gives an accurate reading about an ongoing trend. The indicator is easy
to use and gives an accurate reading about an ongoing trend. It is constructed with two
parameters, namely period and multiplier. The default values used while constructing a
Supertrend indicator are 10 for average true range or trading period and 3 for its
multiplier. “The average true range (ATR) plays an important role in 'Supertrend' as the
indicator uses ATR to calculate its value. It indicates the direction of the price movement
in a market that is trending, that is following any particular path. It is plotted in stock
price charts for investors to see marked current trend which is shown in red when prices
have dipped and green when prices have risen.
3.1.1 How Does Super-Trend Indicator Works?
The super-trend indicator relies on two fundamental dynamic values - period and
multiplier. But before we get into that, it is important to understand the concept of
Average True Range (ATR). It is yet another indicator that gives you market volatility
value by decompressing the range of prices of a security for a particular time.
A true-range (TR) indicator is the highest of these values (current high minus current
low), absolute value (intrinsic value) of the current high minus previous close and the
absolute value of the current low minus previous close. To calculate the ATR, we need to
find the series of TR values first, and then divide the above with the number of periods
represented by n. This way, you get the moving average of true ranges.
3.1.2 Buy and Sell Signals
A super-trend indicator is plotted on either above or below the closing price to signal
a buy or sell. The indicator changes color, based on whether or not you should be buying.
If the super-trend indicator moves below the closing price, the indicator turns green, and it
signals an entry point or points to buy. If a super-trend closes above, then the indicator
shows a sell signal in red.
You will also note that at the point where buy or sell signal is generated is the
crossover point. At the point say, buy signal is made and the indicator turns green you
will see, on hovering the cursor at this point, the closing price is higher than indicator
value. Similarly, when a sell signal is generated, and the indicator turns red, the closing
price will be seen lower than the indicator value.
There are different setting for different time frame to archive different goals. The
bellow table [Table 1 – Different Settings with different time frame of Supertrend]
display setting for multiple time frame.
Table 3.1 – Different Setting with different time frame of Supertrend

Sr. No. Goal Periods Multiplier Time Frame of Chart

Intraday Trading 5 Min
1 Positional Trading 9 9 15 Min
Long Term Trading Daily
Intraday Trading 5 Min
2 Positional Trading 14 3 15 Min
Long Term Trading Daily
Intraday Trading 5 Min
3 Positional Trading 10 3 15 Min
Long Term Trading Daily

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Figure No. 3.1.1 - Super Trend with Time Frame -5Min

From the Figure No. 3.1.1- Super Trend with Time Frame -5Min it is observed
that when we are applied multiple Supertrend indicator with different parameters for to
NIFTY charts for 5 Min time frame, there are multiple buying and selling signal are
generated for Supertrend (10,3) & Supertrend (14,3) but there is no difference between
buying and selling signal. In case of Supertrend (9,9) buying and selling signal are
generated less. Trader can trade multiple trades to book small profit in small intervals.

Figure No. 3.1.2 - Super Trend with Time Frame -15Min

From the Figure No. 3.1.1- Super Trend with Time Frame -15Min it is observed
that when we are applied multiple Supertrend indicator with different parameters for to
NIFTY charts for 15 Min time frame, there are multiple buying and selling signal are
generated for Supertrend (10,3) & Supertrend (14,3) but there is no difference between
buying and selling signal. In case of Supertrend (9,9) buying and selling signal are
generated less. Trader can trade multiple trades to book small profit in small intervals.

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Figure No. 3.1.3 - Super Trend with Time Frame 1Day

From the Figure No. 3.1.1- Super Trend with Time Frame -1Day it is observed
that when we are applied multiple Supertrend indicator with different parameters for to
NIFTY charts for 1Day time frame, there are multiple buying and selling signal are
generated for Supertrend (10,3) & Supertrend (14,3) but there is no difference between
buying and selling signal. In case of Supertrend (9,9) buying and selling signal are
generated less. Trader can trade multiple trades to book small profit in small intervals.

3.2 Relative Strength Index [RSI]

It is also called a momentum oscillator or momentum indicator used in technical
analysis that measures the magnitude of recent price changes to evaluate overbought or
oversold conditions in the price of a stock or other asset. It measures the ratio of up-
moves to down-moves, and normalizes the calculation so that the index is expressed in a
range of 0 to 100. The RSI provides technical traders signals about bullish and bearish
price momentum, and it is often plotted beneath the graph of an asset's price. RSI is also
used to estimate the trend of the market, if RSI is above 50, the market is an uptrend and
if the RSI is below 50, the market is a downtrend.
If the RSI is 70 or greater than is taken as a signal that prices have raised more than
market expectation then there is overbought is considered. And If the RSI is 30 or less
than is taken as a signal that prices have fallen more than market expectation then there is
oversold is considered.
3.2.1 How this indicator works
RSI also often forms chart patterns that may not show on the underlying price chart,
such as double tops and bottoms and trend lines. Also, look for support or resistance on
the RSI. In an uptrend or bull market, the RSI tends to remain in the 40 to 90 range with
the 40-50 zone acting as support. During a downtrend or bear market the RSI tends to stay
between the 10 to 60 range with the 50-60 zone acting as resistance. These ranges will
vary depending on the RSI settings and the strength of the security’s or market’s
underlying trend. If underlying prices make a new high or low that isn't confirmed by the
RSI, this divergence can signal a price reversal. If the RSI makes a lower high and then
follows with a downside move below a previous low, a Top Swing Failure has occurred.
If the RSI makes a higher low and then follows with an upside move above a previous
high, a Bottom Swing Failure has occurred.

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3.2.2 Buy and Sell Signals

Table 3.2 – Different Setting with different time frame of RSI

Sr. Over Over Time Frame

Goal Period
No. Bought Sold of Chart
1 Intraday Trading 9 to 11 5 Min
2 Positional Trading 14 70 30 15 Min
3 Long Term Trading 20 to 30 Daily

Figure No. 3.2.1 – RSI (9), Time Frame -5Min

From the Figure No. 3.2.1- RSI (9), Time Frame - 5Min it is observed that when
we are applied Periods is 9 as a parameter to RSI indicator for to display NIFTY charts
for 5 Min time frame, there are multiple over bought and oversold signal are appear
during the time fame.

Figure No. 3.2.2 – RSI (14), Time Frame -15Min

From the Figure No. 3.2.2- RSI (14), Time Frame -15 Min it is observed that when
we are applied Periods is 14 as a parameter to RSI indicator for to display NIFTY charts
for 15 Min time frame, there are less number of overbought and oversold signal are
appear during the time fame.

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Figure No. 3.2.3 - RSI (20), Time Frame -1Day

From the Figure No. 3.2.3- RSI (20), Time Frame – 1 Day it is observed that when
we are applied Periods is 20 as a parameter to RSI indicator for to display NIFTY charts
for 1day time frame, there are multiple overbought and oversold signal are appear during
the time fame.

IV. Methodology
A technical indicator is a forecast signal that predicts future price movements, while
a lagging indicator looks at past trends and indicates momentum. But if the trader makes
profit on each day then trader is not only focused on single indicator. A trader can applied
multiple technical indicator at a time with different time interval for exactly entry point
and proper exit from the market with profit. Here, we are applied two technical indicator
at the same time with different time interval.

Figure 4.1 Combination of Supertrend(14,3) and RSI (9)

Figure 4.2 Combination of Supertrend (14,3) and RSI (14)

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Figure 4.3 Combination of Supertrend(14,3) and RSI (20)

From the above all three figure numeral Figure No. 4.1, Figure No. 4.1 and Figure
No. 4.1 it is observed that when we are applied Periods is 14 and Multiplier is also 3 as a
parameter to Supertrend indicator and Periods is 9, 14 and 20 as a parameter respectively
to RSI indicator for multiple time frame 5min, 15min and 1 Day respectively. There are
multiple buying and selling single created using Supertrend indicator at different time
span. The RSI indicator gives overbought and oversold signal that appear during the time
frame. From these two indicators a trader find the exact entry point and proper exit from
the market trade.

V. Conclusion
Thus these two indicators when efficiently used helps in making exact technical
analysis which in turn helps in identifying the right time to enter and get exited from the
market. Since these indicators like Supertrend and relative strength index uses its own
past performance to predict the future movement, they become more reliable and effective
in decision making of call and put option related to buying NIFTY.

VII. Acknowledgments
The researchers are grateful to the authors, writers, and editors of the books and
articles, which have been referred for preparing the presented research paper. It is the duty
of researcher to remember their parents whose blessings are always with them.

VIII. References
[1] Sudheer, V., Trading Through Technical Analysis: An Empirical Study From Indian Stock
Market, International Journal of Development Research, Vol. 5, Issue, 08, pp. 5410-5416,
August, 201, 5410-5416
[2] Pushpa BV, Sumithra C.G, Madhuri Hegde, Investment Decision Making Using Technical
Analysis: A Study on Select Stocks in Indian Stock Market, IOSR Journal of Business and
Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 19, Issue 9. Ver.
VI. (September. 2017), PP 24-33
[3] Talwar Shalini, Shah Pranav, Shah Utkarsh, Picking Buy-Sell Signals: A Practitioner’s
Perspective On Key Technical Indicators For Selected Indian Firms, Studies in Business and
Economics no. 14(3)/2019,205-219
[4] Jan Ivar Larsen, Predicting Stock Prices Using Technical Analysis and Machine Learning,
Norwegian University of Science and Technology Department of Computer and Information
Science, June 2010,1-81
[5] International School of Financial of Markets, Options Trading Strategy,3-15
[6] Ranjit Singh, Reshampal Kaur, Effective and Profitable Stock Trading Strategy, International
Journal of Management & Business Studies, IJMBS Vol. 4, Iss ue 1, Jan - March 2014, 36-38
[7] Kadida Ramadhani Shagilla Mashaushi, An Analysis of Technical Trading Strategies, The
University of Leeds Leeds University Business School, September, 2006, 2-213

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