Is buying the biggest loser of the day then selling it tomorrow an effective BTST strategy?

  • Jan-21-2020

Many times you would have noticed that a stock that lost the most for the day end up gaining the most next day. Is buying the biggest loser of the day. then selling it tomorrow an effective BTST strategy? Let us test the same with last 12 years of historical data, for testing purpose lets consider Nifty 50 stocks.

Rules:

  1. Buy biggest loser of the day at Close price
  2. Sell it next day at Close price

In order to test it with historical Nifty 50 stocks, we should know what are the list of Nifty 50 stocks from 2007 to 2019. Nifty 50 stocks are not constant, the list gets updated at regular time intervals. Some stocks gets added and some gets excluded. Stocks like RCOM, Unitech, DHFL were part of Nifty 50 stocks once upon a time. So if we test the strategy with list of stocks that are part of current nifty 50, then we might end up with hindsight bias.

We will pull all Nifty historical constituents and test the strategy with respect to each of Nifty 50 stocks.

From 2007 Jan to 2019 Dec, for last 12 years there were 3085 trades.

As you can see from the data, the total PnL is -986% returns. Buying the biggest loser and selling it next day is clearly a consistently losing strategy.

Ok, what if we reverse the strategy, it might end up in profits?

Rules:

  1. Short biggest loser of the day at Close price
  2. Buy it back next day at Close price

Yes, it resulted in profits, but the drawdown is more than -65% which means, there is a chance of blowing up of capital. So you need to trade with 1/3rd of your capital. If your capital is 1 lac, then trade with around Rs.30,000 only, this way, even if your full capital of 30k is lost, you are still left with 70k more to continue trading.

But other things to consider are transaction cost and slippages, which could reduce your over all profits to certain extent.

Coming back to BTST rules,

What if we buy the biggest loser but the change the exit from Close to Open?

Rules:

  1. Buy biggest loser of the day at Close price
  2. Sell it next day at Open price

By altering the exit criteria, the PnL has turned positive. It has given 535% returns over all.

But if you check the average profit per trade, its very minimal, the above PnL doesn’t include transaction charges and slippages, if you add that then even this exit condition will also result in drastic loss.

Conclusion: Applying Buy today sell tomorrow strategy with the stocks that are the biggest loser for the day, is not profitable. Whether you exit at next day close or at next open, both could end up in loss. Instead, Shorting the biggest loser and buying it back on next day close, has shown some edge.

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  • profile
    P J Lal
      6 months ago

    Excellent. Do you have any such study done for Nifty options both for buying and selling. Had I bought Nifty options weely and monthly which would have given me the buck for the bang considering the fact I am paying 1/2 of premium as against buying weekly options. On the face of it, weekly looks good for sellers. They are getting 4 x 1/2 twice more premium by selling. And skillful buyers also can make more money in weeklies because gamma is high in weeklies.

    Reply 1 comments
    • profile
      Square Off
        6 months ago

      There is some study we made on options trading which is shared here https://www.squareoff.in/single-post/Bank-Nifty-option-strategyHero-or-Zero

  • profile
    P J Lal
      6 months ago

    Excellent.

    Reply 0 comments
  • profile
    Vadla Vishwanatham
      6 months ago

    STBT is available at which broker

    Reply 2 comments
    • profile
      K V Rao
        6 months ago

      All Brokers

    • profile
        6 months ago

      STBT is done with future of a stock. not in cash.

  • profile
    Lakshminarasima R
      6 months ago

    Sir how about ur BTST strategy recently added by you???? Is it the same

    Reply 2 comments
    • profile
        6 months ago

      Short today and buy next day closing is a good strategy, but at which broker such facility is available...short today..buy next day..normally we can buy today..and sell tomorrow..

    • profile
        6 months ago


  • Tags | BTST Trading strategy,BTST,Buy Today Sell Tomorrow,STBT,Sell Today Buy Tomorrow