There are many important indices on the National Stock Exchange of India (NSE), one of which is Bank Nifty. In the following review, we will explain how to trade using Bank Nifty’s intraday and options trading strategies.
What is Bank Nifty?
Nifty 50 and Bank Nifty are some of the most famous indexes of NSE. But we will focus on the second one. Bank Nifty includes 12 stocks of the largest and most liquid banks in terms of capitalization: HDFC, ICICI, Kotak Mahindra, Axis, etc. Investors and traders use Bank Nifty to track the performance of these bank stocks on the market.
Like other NSE indices, Bank Nifty is calculated using the free float market capitalization method. However, not every trading strategy for Nifty 50 is worth using with Bank Nifty.
How to invest and trade the Bank Nifty index?
Since it comprises multiple stocks, the index cannot be bought directly like an ordinary stock. The two main ways to trade the Bank Nifty index are mutual funds and derivatives.
Mutual funds are one of the safest and most popular methods for investing. These funds have the same portfolio of stock as the index. You invest in all 12 Nifty Bank components and get broad market access. Unlike other types of mutual funds, index funds offer the best diversification, which allows you to make good profits.
You can also invest in Bank Nifty through exchange-traded funds (ETFs), but it is essential to be careful when choosing. Nifty BeES, the first ETF in India, refers to another index, the Nifty 50.
You can invest in the Bank Nifty index using both classes of derivatives, namely futures and options contracts.
How to trade futures contracts?
By either taking a long bullish position or a short bearish one, you can buy and sell Bank Nifty futures contracts to profit from future price movements of the index.
How to trade Bank Nifty options?
With Bank Nifty options trading, you need to forecast whether the value of the index will rise or fall within a stipulated time. If, for example, you expect the current value of 17,500 to fall to 13,000 within the next week, you need to purchase options contracts stipulating that the index would fall to 13,000 in 7 days. If, after the expiry of the Bank Nifty options, the asset does move that way, you can take your profits.
You can adopt many strategies in Bank Nifty options and futures trading.
4 simple strategies for options trading
Below we will look at four strategies for trading Bank Nifty options, suitable for beginners and experienced traders. They will show you how to trade effectively in the day market.
Bullish Strategy: Long Call
If you are bullish on the index, you can purchase long call options. There is some significant risk, but the profits can be massive. Since this is a call position, you earn profits if the value of the index closes above the strike price; losses work vice-versa.
Bearish Strategy: Long Put
On the other hand, if you are bearish on the Bank Nifty index, you can buy put options exercised when the index price goes down.
Bullish Strategy: Short Put
You can also sell put options if you are bullish on the stock, i.e., you expect the price to rise or stay low in a sideways range. But if the share price falls below the strike price by more than the amount of the premium, you will lose the investment.
Bearish Strategy: Short Call
The latest popular strategy for trading in the Bank Nifty index is to sell call options. If the price does go down, the option is not exercised, and you make a profit.
Intraday Nifty strategies
You can also trade in Bank Nifty options intraday. The essence of intraday trading strategies is to open and close the same position before the end of the market day. Let’s take a closer look at the most popular techniques.
At the heart of this strategy is following the momentum of the market. You must identify stocks suitable for trading before the trend changes significantly. Since stock prices are affected by external factors, among other things, it’s crucial to stay up to date on quarterly earnings, breaking news, and more.
There are various momentum indicators, such as Stochastics, Relative Strength Index (RSI), and the Rate of Change (ROC) indicator.
This strategy for intraday trading in Bank Nifty is to look for stocks going to or have already gone beyond the range they usually trade. You need to find threshold points for rising or falling prices. If the chart rises above such a point, this is a signal to open a long position and buy. If the price drops below, then you should sell or open short positions.
This strategy lies in trading against the market trend based on technical analysis. It is more complex and carries higher risks because pinpointing strengths and pullbacks are difficult for most novice traders. To implement a reversal strategy, you must have more profound market knowledge.
Scalping is a type of trading aimed at profiting from small price changes. It basically does not require technical and fundamental analysis. However, for successful scalping, it is vital to choose the right stocks: they must be both liquid and volatile. To reduce the risk of loss, scalpers also make sure to set a stop loss for each order.
Moving average crossover strategy
It is a trend-trading strategy. When prices are above the moving average, it indicates an uptrend; when below, it is a downtrend. On an uptrend, you should buy stocks or enter long positions; on a downtrend, enter short positions or sell.
Besides intraday futures/options trading, you can use a positional strategy, which consists of holding a position for at least two days. To find hidden support and resistance levels for its successful application, study the Bank Nifty open interest chart.
VWAP trading strategy for Bank Nifty
VWAP is a simple intraday trading strategy in which you must use the current day’s volume-weighted average price (VWAP) and the previous day’s end-of-day (EOD).
Let’s see how to use this strategy on the example of a 15-minute chart:
- When an asset crosses the High of a bullish 15-minute candle that touched and closed above the current day’s VWAP, it’s a buy signal.
- When an asset crosses below the Low of a bearish 15-minute candle that touched and closed below the current day’s VWAP, it’s a sell signal.
So, when an asset is trading above the previous day’s closing VWAP, it is bullish, and if it is trading lower, it is bearish.
Investing in the Bank Nifty index is one of the best ways to earn income from the Indian market. However, when looking for the best trading strategy, remember that no technique guarantees 100% success. To reduce the risk of losing funds, you must learn and practice. Explore the Nifty Trading Academy courses, download the Bank Nifty option trading strategies booklet in PPT or PDF, and watch the tutorial video on YouTube.