India Trading Strategy (Backtest And Example)

Last Updated on November 3, 2022

One of the benefits of globalization is that you can tap into investment opportunities in different parts of the world. As one of the fast-growing economies, India and its stock markets provide opportunities for investors who seek opportunities in the Asian markets. But what would be an Indian market trading strategy?

Apart from trading the American Depositary Receipts (ADRs) of Indian stocks listed on US exchanges, you can also trade Indian stocks listed on the Bombay stock exchange (BSE) and the National stock exchange (NSE) of India. However, you would have to open a brokerage account with an international broker with a presence in the Indian market, such as Interactive Brokers.

In this post, we take a look at how to trade Indian stocks, and we provide a backtested Indian trading strategy at the end of the article.

How can you trade Indian stocks?

Apart from trading the American Depositary Receipts (ADRs) of Indian stocks listed on US exchanges, you can also trade Indian stocks listed on the Bombay stock exchange (BSE) and the National stock exchange (NSE) of India.

However, to have access to the Indian stock market as a Westerner, you would have to open a brokerage account with an international broker with a presence in the Indian market, such as Interactive Brokers. You can also open an account with a SEBI-registered local Indian stockbroker, but it is very difficult and you may not like the services.

The most common way western investors gain exposure to the Indian stock market is by investing in India-focused mutual funds and exchange-traded funds (ETFs) or exchange-traded notes (ETNs) that are listed on foreign exchanges. Many who want to trade individual stocks trade American or Global Depositary Receipts (ADRs or GDRs).

How many Indian stocks are there?

It is difficult to know the total number of Indian stocks there are at the moment, as they increase all the time. However, we can estimate that by checking the number of stocks listed on Indian major stock exchanges, even though some foreign stocks may also be among the stocks listed on Indian exchanges.

The two main stock exchanges in India are the National Stock Exchange of India and the Bombay Stock Exchange. As of the 2021 financial year, there were a total of over 7,462 stocks listed n the National Stock Exchange of India and the Bombay Stock Exchange. The majority of these stocks were listed on the BSE, with a little more than 1300 securities on the NSE.

At 7,462 stocks, the Indian stock market has one of the highest numbers of listed stocks in the world. However, the list might include foreign stocks listed on Indian stock exchanges.

What are the biggest Indian companies or stocks?

These are some of the biggest Indian companies:

Reliance Industries: Reliance Industries Limited (RIL) is an Indian multinational company headquartered in Mumbai. It is a conglomerate company with diverse businesses including energy, petrochemicals, natural gas, retail, telecommunications, mass media, and textiles. As of writing, it is one of the most profitable companies in India, the largest company in India as measured by revenue, and the largest publicly traded company in India by market capitalization.

Tata Consultancy Services (TCS): This is an Indian multinational information technology (IT) services and consulting company with its headquarters in Mumbai. TCS is a part of the Tata Group and operates in 149 locations across 46 countries. As of the time of writing, it is the second largest Indian Company by market capitalization and is among the most valuable IT service brands worldwide.

HDFC Bank: Incorporated in 1994, HDFC Bank Limited is an Indian banking and financial services company headquartered in Mumbai. It is India’s largest private sector bank by assets and the world’s 10th largest bank by market capitalization as of 2021. As of writing, it is the third largest company by market capitalization of $122.50 billion on the Indian stock exchanges.

Infosys Limited: This is an Indian multinational information technology company, offering business consulting, information technology, and outsourcing services. Infosys was founded in Pune and is headquartered in Bangalore. It is the second-largest Indian IT company after Tata Consultancy Services.

Hindustan Unilever (HUL): Established in 1933, HUL is a British-Dutch manufacturing company headquartered in Mumbai, India. It is a subsidiary of Unilever, a British company that manufactures consumer goods. HUL produces and supplies foods, beverages, cleaning agents, personal care products, water purifiers, and consumer goods.

Life Insurance Corporation of India (LIC): This is an Indian statutory insurance and investment corporation, headquartered in Mumbai. Serving for more than 65 years, the LIC is one of the oldest and largest insurance providers in India. It was under the ownership of the Government of India but is now listed on the stock exchange as the only public insurance player in the country. LIC is also one of the largest asset managers in India.

Housing Development Finance Corporation Limited (HDFC): Founded in 1977, HDFC is an Indian financial services company based in Mumbai. It is the first specialized mortgage company in India and a major provider of finance for housing. The company also has a presence in banking, life and general insurance, asset management, venture capital, realty, education, deposits, and education loans.

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Backtested trading strategies

Please keep in mind that by the time you read this article the above mentioned companies might not be among the biggest anymore. Capitalism is very good at filtering out companies and replace them with better or more efficient ones. Because of this, stock picking is very difficult. You might want to read the following article:

How is the Indian economy?

With a population of about 1.1 billion, India is the world’s biggest democracy. It runs a federal democracy, consisting of 28 union states and eight union territories. The government has three primary branches: the legislative (Parliament), the executive (government and Council of Ministers), and the judiciary (Supreme Court). It is a parliamentary system of government, so even though the president of the republic is the nominal head of the executive branch, the prime minister is the de facto chief executive.

Although India runs a democratic government, there is a lot of red tapes. Nonetheless, its middle-income developing market economy is one of the fastest-growing in the world — currently the world’s fifth-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP). Interestingly, its long-term growth perspective remains positive due to its young population and corresponding low dependency ratio, healthy savings, and investment rates, increasing globalization in India, and its integration into the global economy.

Indian trading strategy (backtest)

Let’s go on to make an Indian trading strategy with strict trading rules and settings:

India trading strategy no 1

Is there a Santa Claus rally in Indian stocks? Let’s backtest and find out. We make the following trading rules:

  1. We go long at the close of the second Friday in December.
  2. We exit at the close of the first trading day of the new year.

We only have data back to 2007 and we use the cash index for our backtest.

India trading strategy (backtest)
There seems to be a pretty consistent Santa Claus rally in Indian stocks.

The average gain per trade is 1.75%, the win ratio is 79%, the profit factor is 8, and the max drawdown is 7%.

These are pretty strong trading performance metrics! It’s clearly a Santa Claus rally in Indian stocks.

India trading strategy no 2

In the US market there is a very strong seasonal tendency at the end of the month.

Thus, it could be interesting to backtest if there is an end of month effect in Indian stocks.

We make a strategy optimization (how to optimize a trading strategy) to find out the best day of entry: from the ten last trading day of the month until the second last one. We sell at the close of the month.

The table below shows the results:

India trading strategy (optimization)

The first column indicates at which trading day we enter. Clearly, the fifth and sixth last trading day of the month is the best, indicated by the profit factor.

Based on the results we make new trading rules:

  • We go long at the close of the fifth last trading day of the month.
  • We sell at the close of the second trading day of the new month.

The equity curve of this strategy looks like this:

India trading strategy trading rules
There is a pretty strong end of month seasonality in Indian stocks.

You get 10.5% annual returns by only being invested the last five trading days of the month. This is better than buy and hold while only being invested in stocks about 30% of the time.

However, please keep in mind that the strategy is slightly curve fitted (what is curve fitting?). But the results are reasonably robust because of the strong results no matter if we use 10 days or less when we enter.

India trading strategy – ending remarks

We made two Indian trading strategies in this article: one showing a strong Santa Claus rally and one indicating a pretty strong end of month anomaly. These are just two examples of how you can make an India trading strategy.

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