How do I trade using SMT
The Smart Money Indicator or SMT I am in the process of developing is supposed to be a leading (at least not lagging) indicator which by it's design senses the big money flow and the speculators' position in the market. While doing so it tries to give an idea of the immediate future movement of the market we can expect. Of course the whole financial world is dynamic and the mood of the market may change drastically at any moment depending on the upcoming news from around the world. However, until such an impacting news changes the global risk sentiment drastically we can assume that the big money will follow its current path.
Simply from looking at the day to day price changes it is impossible to understand the undercurrent of the market. The predetermined next move by the big players must be analyzed properly to create a non-lagging indicator. SMT exactly tries to achieve that taking clues from their activities in the derivatives market.
The overall market (eg. indices) must move in tandem with the SMT but in certain times they don't do so and that is when our opportunity to act arises. By spotting certain types of divergences between the market and SMT we can forecast the immediate next movement with very good accuracy (please read my regular and updated blog posts for an explanation). However for actually trading the market we need a system in place (when to get out of the trade either with loss or profit) and only predicting the direction is not enough for that. Since SMT does not give us any particular support/resistant levels it is difficult to put arbitrary stop loss or take profit orders from this information.
Therefore I use a hedging strategy which involves taking a position in the NIFTY futures market (whenever I get a fresh signal from SMT) and hedging that position by selling OTM calls or puts in the ratio of 10:16. The selection of OTM strike is based on the option delta. I choose the strike with ~0.38 delta, exit ALL the positions when this delta reaches ~0.62 (with profit) or ~0.20 (with loss). If someone is not familier with this type of hedging trades I would recommend a book by Mr. Avinash Khilnani which is available at Amazon at a very reasonable price. I have learned this style of trading from Mr. Khilnani and found it very effective. One can visit this link for the book description, readers' review and also to purchase from there.