7. Strategy Foundations

A strategy is a repeatable set of rules with a positive expected value over many trades. Not a single tip, not a hunch.

What makes a strategy?

Every strategy must define:

1. Universe — which stocks/instruments you’ll trade (e.g., Nifty 100, F&O list).
2. Setup — exact conditions to look for (the “screen”).
3. Entry trigger — what fires the order (e.g., break of high).
4. Stop loss — where the thesis is invalidated.
5. Target / exit — where you take profit (or how you trail).
6. Position sizing — derived from risk (see Chapter 6).
7. Time stop — exit if nothing happens within X bars/days.

If any one is missing, you don’t have a strategy — you have a guess.

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The three foundational styles

1. Trend Following

“Buy high, sell higher.”

Idea: Once a trend starts, it tends to continue. Ride it.

• Entry: Pullback to a moving average in an uptrend, or breakout from consolidation.
• Tools: EMAs, Supertrend, ADX (>25), higher highs / higher lows.
• Exit: Trailing stop (this is the bread and butter of StalkMarket).
• Win rate: Lower (~35–45%), but big winners pay for many small losers.
• Best in: Trending markets. Gets chopped up in ranges.

Classic setup — “EMA pullback long”:

1. Daily chart, price above 50 EMA, ADX > 20.
2. Wait for price to dip to the 20 EMA.
3. Entry: bullish reversal candle (hammer, engulfing).
4. SL: below the swing low.
5. Trail with 20 EMA or Supertrend.

2. Mean Reversion

“What goes up must come down (a little).”

Idea: Price stretches too far from its mean and snaps back.

• Entry: Oversold in an uptrend, overbought in a downtrend.
• Tools: RSI (<30 / >70), Bollinger Band touches, distance from VWAP.
• Exit: Return to the mean (e.g., 20 SMA, VWAP) or fixed target.
• Win rate: High (~60–70%), but small wins, occasional big losses if you trade against a strong trend.
• Best in: Range-bound markets, large-cap blue chips.

Classic setup — “RSI oversold bounce”:

1. Stock in clear uptrend on weekly (price > 50 weekly EMA).
2. On daily, RSI dips below 30.
3. Entry: next day’s open after a green candle.
4. SL: below recent low.
5. Target: 20 SMA.

3. Breakout

“Trade the move when energy releases.”

Idea: Price compresses (consolidation, triangle, range), then explodes when one side gives up.

• Entry: Break above resistance / below support, with volume confirmation.
• Tools: Donchian channels (20-day high), Bollinger squeeze, volume spike.
• Exit: Measured move (height of the pattern projected), or trailing stop.
• Win rate: Medium (~45–55%), but breakouts often run hard.
• Beware: Fakeouts — false breakouts that immediately reverse. Volume is the filter.

Classic setup — “20-day high breakout”:

1. Stock makes a new 20-day high.
2. Volume > 1.5× the 20-day average volume.
3. Entry: at the breakout (or 5-min close above).
4. SL: below the prior consolidation high (now support).
5. Trail with 10 EMA or chandelier exit.

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Backtesting & paper trading

Don’t trade real money on an idea until you’ve:

1. Backtested it on at least 2–3 years of data (different market regimes — bull, bear, sideways).
2. Paper traded it live for ≥ 30 trades.
3. Confirmed the expected value is positive after costs.

Expected value (EV) per trade

$EV = (\text{Win Rate} \times \text{Avg Win}) - (\text{Loss Rate} \times \text{Avg Loss})$

If EV ≤ 0 after brokerage, STT, GST, slippage — your strategy is broken.

Costs add up

A typical Indian intraday trade costs ~0.05–0.1% round-trip in charges. Over 200 trades a year that’s 10–20% of capital eaten in fees alone. Choose a discount broker, trade selectively.

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Common strategy archetypes (further reading)

Archetype	Holding	Style
Scalping	seconds–minutes	Tiny edges, high frequency
Intraday momentum	minutes–hours	News + breakout
Opening Range Breakout (ORB)	intraday	Trade the break of first 15-min range
Swing trading	days–weeks	Daily charts, trend/breakout
Positional	weeks–months	Weekly charts, fundamental tailwind
Pairs trading	varies	Long/short correlated stocks
Event-driven	varies	Earnings, mergers, results

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The mantras

1. One setup, mastered, beats ten setups, dabbled in.
2. Edge × discipline × time = wealth. Miss any factor → no compounding.
3. The market pays you for waiting. No setup → no trade. Cash is a position.
4. Process over outcome. Bad trades can win, good trades can lose. Judge yourself by adherence to the plan, not by P&L on a single trade.