Tips on Trading Profitably in Bank Nifty

Bank Nifty is a popular tradable derivative instrument that several investors and traders bet on a regular basis.Yogesh Supekar discusses at length the issue of how best to trade in Bank Nifty while Karan Bhojwani shares his outlook on Bank Nifty 

Banking stocks are widely owned by investors and traders in India. Small investors and even high net-worth individuals (HNIs) have been able to create wealth for themselves by investing in banking stocks. Indeed, banking stocks such as HDFC Bank and Indusind Bank have turned out to be top quality multibaggers in the past couple of decades. While banking stocks have proven to be great for long-term investors, the population of traders who bet and specialise on Bank Nifty alone has been growing rapidly. One of the reasons why Bank Nifty is popular amongst the traders is the volatility factor. Bank Nifty is a high beta index, which means that the price movement in Bank Nifty can be larger than the key benchmark index, Nifty.

If we consider the data of Bank Nifty as on April 29, 2022, we find that the one-year beta value is 1.15 and the five-year beta value is 1.23. High beta value means that the index will tend to head higher by more margins than the key benchmark index Nifty when the market is in green and high beta also suggests that Bank Nifty may slip more when the market i.e. Nifty falls.

" Never, ever argue with your trading system. " 
— Michael Covel.

Day traders, especially so, prefer taking exposure in the underlying where the movement is large enough to make some quick money. We find that there are now day traders and momentum traders who make a profitable cut each day through trading in Bank Nifty and focus on the instrument that is easy to track and implement various trading strategies.

Defining Bank
Nifty Bank Nifty, also known as Nifty Bank, can be considered just another sectoral index. However, Bank Nifty amongst all the sectoral indices is the most traded index (derivatives instrument) and hence is always in the limelight. The Bank Nifty index comprises the most liquid and large Indian banking stocks.

" Amateurs think about how much money they can make. Professionals think about how much money they could lose. "
— Jack Schwager.

The index’s true purpose is to provide investors and market intermediaries a benchmark that captures the capital market performance of the Indian banks. The index comprises maximum 12 companies listed on the National Stock Exchange of India (NSE). Bank Nifty index is computed using free float market capitalisation method. HDFC Bank (27.04 per cent), ICICI Bank (23.03 per cent), Kotak Mahindra Bank (11.72 per cent), SBI (11.27 per cent) and Axis Bank (11.18 per cent) have highest weightage in the Bank Nifty index.

Trading in Bank Nifty
When taking exposure on Bank Nifty using derivatives’ instrument, one of the best ways to make some consistent money is to identify the weekly range for Bank Nifty and write options. Of course, there are risks involved when one writes options but with some good trading skills and technical know-how a trader can easily identify a broad range for Bank Nifty. After estimating the broader range and observing the broader market trends, one can write options aiming to generate some cash flow on a weekly basis.

Bank Nifty Vs Nifty

The table below highlights the outperformance of Bank Nifty over Nifty in 2022. However, banks have underperformed Nifty in the past three years and in five years. The 10 years’ performance however reflects Bank Nifty’s outperformance One of the most effective ways to estimate the range of Bank Nifty is to observe the ATM CE and ATM PE of Bank Nifty.

For example, if Bank Nifty is trading at 36,000 levels and the 36,000 strike price CE is available at ₹ 500 and 36,000 Strike price PE is available at ₹ 400 then in that case one can ascertain based on the option premium the broader range for Bank Nifty. In this example, the range for Bank Nifty can be 36,500 (36,000 + 500) and 35,600 (36,000 – 400). Another most useful method to ascertain the key support and resistance levels is to interpret the options data. The levels where we see maximum call writing happening will act as major resistance and the various levels where we see maximum put writing can act as support for Bank Nifty.

Options data can be extremely useful to observe the breakouts as well. For example, in Bank Nifty if maximum call writing has happened at 36,000 levels and if the 36,000 levels have been breached with volumes on the higher side, one can conclude it as a decent breakout and it implies that upside potential exists. Says Amol Jadhav, an active trader: “I have been successfully trading in Bank Nifty now for more than three years. The advantage of trading in Bank Nifty is its tendency for large movements and huge volume. I give a lot of importance to the options data and observe the levels where maximum writing has happened.”

“The put call ratio (PCR) data also is important information to make up my mind along with the options writing levels. What I also do is that for intraday positions I observe the OI data. If OI is increasing with rising price I prefer to go long and vice-aversa. For example, if the PCR is indicating bullishness and Bank Nifty is trading close to its support levels or has just broken the resistance level and with the price rise the open interest is also increasing, I tend to go long. If, let’s say, Bank Nifty is trading at 36,000 at 10 am and after 30 minutes i.e. at 10.30 am Bank Nifty is trading at 36,150 with increased open interest while heavy call writing was seen at 36,100 levels, I tend to go long,” he adds.

Outlook on Bank Nifty
Bank Nifty has formed a big bull candle on Monday. For the last 10 days, the index has been oscillating around the 50-day moving average. The gap down openings within the long-term downtrend is common. The big gap of April 18 has been partially filled; however, this gap has to be completely filled in order to regain strength on the upside. In any case, if it sustains above the level of 36,720, it is likely to witness a short-term bounce. On other hand, with a close below the level of 35,460 the index will form another lower low in the intermediated downtrend, which is a big negative for the sector. Interestingly, the trajectory of the 50 DMA is downward tilted.

Meanwhile, the trajectory of 200 DMA is flattened. But the gap between these two key moving averages is increasing after a death cross, which is also a strong bearish sign. The RSI is moving between the zones of 44 and 50 in a squeeze. A decline below 44 could be an ominous sign. In the banking space, the PSU banks relatively have a better momentum but are lagging in the weakening quadrant in RRG chart. The private sector bank index is among the weakest in momentum. It is better to avoid going for fresh purchases until we see a decisive close above the level of 36,720.

“Daily pivot points are very important while indulging in intraday and BTST positions. It is important to distinguish between the bull and bear zones. I think it is important to stick to your favourite technical indicators and specialise in using those. I use a combination of RSI, super trend and moving average crossovers. Along with the bullish options data, if the RSI is trending up and we have a bullish moving average crossover, it is confirmation of a bullish trend. Discipline and patience are the key factors while trading in Bank Nifty. Because the movement can be large in Bank Nifty compared to several other derivatives instrument, any mistake in trade can easily wipe out the capital instantly,” he further states.

Conclusion
Bank Nifty is gaining popularity amongst traders, both intraday and momentum. The pay-off can be extremely attractive if the trader is accurate in terms of analysis and is able to understand the underlying trend. Similarly, because of it high beta nature, Bank Nifty can slip faster than the markets and the ‘long only’ traders can get trapped, thus leading to loss of capital. Basic trading skills, knowledge of derivatives’ market, data interpretation (options), VIX reading to understand the volatility of markets and a rule-based trading system is what is needed to be successful while trading Bank Nifty. A scalper may find trading in Bank Nifty extremely fruitful as it tends to provide several sharp movements in a normal trading session, thus creating opportunities for quick entry and exits. Appropriate use of technical analysis along with accurate reading of derivatives’ data and VIX can provide an unparalleled advantage to the trader.