Quantamental Analysis Methodology & Capital Feasibility

This page outlines the core quantitative indicators, formulas, risk management stop distances, and capital allocation feasibility guidelines utilized across the Market Intelligence Platform.

1. Core Quantitative Metrics

Our screener gauges rotation, momentum, and relative strength using mathematically separated dimensions:

A. Relative Strength (RS) Leadership Score

• Purpose: Identifies medium-term outperformance compared to the benchmark index (Nifty 50).
• Calculation Window: 60 Days (approx. 3 months).
• Formula:

$$\text{RS Leadership Score} = \text{Stock Return (60d)} - \text{Nifty 50 Return (60d)}$$

• Interpretation: A positive score indicates relative strength and institutional capital accumulation. High-RS stocks tend to break out stronger and hold pullbacks better.

B. Momentum Score

• Purpose: Tracks short-term price velocity and trend strength.
• Calculation Window: 20 Days (approx. 1 month).
• Formula:

$$\text{Momentum Score} = \text{Stock Return (20d)}$$

• Interpretation: Gauges immediate momentum and explosive trend runs.

C. Market Breadth

• EMA 20 / SMA 50 / SMA 200 Breadth:
• Measured as the percentage of component stocks in a group trading above their respective Moving Averages.
• Used to evaluate the structural participation of the broader sector or industry. Low breadth indicates high sector concentration (few heavyweights carrying the group), whereas high breadth indicates a healthy, broad-based rally.

2. Institutional Trade Setups & Confidence Levels

Signals are tracked across seven custom algorithmic setups:

1. Opening Range Breakout (ORB): Enters the direction of the high/low breakout of the first 30 minutes of trading.

2. Theta-Decay Trap: Catches quick reversion moves when option premium decay forces short-covering spikes.

3. Compression Breakout: Enters on Bollinger Band squeeze breakouts (Bollinger bandwidth in bottom 20% + ATR in bottom 30%).

4. Volume Capitulation Reversal: Enters on high-volume climaxes (>2x average volume + >3.0 ATR candle sizes) signaling seller exhaustion.

5. Failed Breakout Reversal: Enters mean-reversion counter-trades when breakouts fail to sustain for 2 consecutive candles.

6. Anchored VWAP Pullback: Re-enters strong trends at the Anchored Volume-Weighted Average Price line.

7. Overnight Premium: Capitalizes on post-close gaps based on late-session volume spikes.

Confidence Level Assignment

• High Confidence: Win Rate $\ge 55\%$ AND trade sample size $\ge 5$ trades.
• Medium Confidence: Win Rate $\ge 45\%$ AND trade sample size $\ge 3$ trades.
• Low Confidence (Auto-Filtered): Setups with win rates $< 45\%$ or trade sample size $< 3$ are flagged as "No Trade (Low Confidence)".

3. Capital Feasibility & Risk Allocation Guidelines

To implement these setups in a live trading account, the following capital budget guidelines are mathematically enforced:

A. Trade Sizing (ATR-Based Sizing)

All trades utilize Average True Range (ATR) to determine the stop loss distance and share size, ensuring equal dollar risk across highly volatile and low-volatility assets.

• Risk Capital per Trade: Configured to ₹1,000 (or $1,000 depending on region).
• Stop Loss Distance: Variable, between 1.2x ATR and 1.5x ATR (with a hard cap at 1.5% of entry price).
• Position Sizing Formula:

$$\text{Position Size (Shares)} = \frac{\text{Risk Capital per Trade}}{\text{Stop Loss Distance (Rupees)}}$$

B. Minimum Capital Feasibility Check

Because stop loss distances are bounded by risk controls:

• At a maximum stop loss of 1.5%, to risk exactly ₹1,000 per trade, the total cash allocation required for that single trade is:

$$\text{Capital Required per Trade} = \frac{\text{₹1,000}}{0.015} = \text{₹66,667}$$

• Capital Requirement Verdict:
• Under standard backtest settings with a ₹100,000 starting cash pool, the portfolio can support at most 1 active trade simultaneously without leverage.
• Taking more than 1 concurrent trade will violate the standard risk rules or trigger partial allocation constraints.
• To run the portfolio with standard diversification (e.g. 5 concurrent active positions of ₹1,000 risk each), a minimum starting capital of ₹333,335 is required.

4. Conviction Scoring Model

The platform computes a unified Conviction Score (0 to 100) to grade opportunities. This score systematically combines fundamental value, technical price action, sector rotation, and index regime alignment.

Score Weighting Structure

1. Technical Setup Quality (35% Weight):

• Active setups are graded from 0 to 10 based on:
• Trend slope steepness (20% of setup score)
• Breakout candle volume and ATR expansion (20% of setup score)
• Pullback retracement depth and declining volume (20% of setup score)
• Trigger candle body ratio and volume confirmation (20% of setup score)
• Path clearance / structural support-resistance distance (20% of setup score)
• Scaled to a maximum of 35 conviction points. If no active setup is present, a trend-following baseline of 10 points is applied if the price lies in a perfect long EMA configuration.

2. Fundamental Business Growth (25% Weight):

• Maps dynamic growth ratings (Grade A to D) based on quarterly Revenue growth (>10%), Earnings stability, Price-to-Earnings-to-Growth (PEG $\le 1.2$), and Price-to-Book (P/B) ratios.

3. Sector Rotation Strength (20% Weight):

• Awarded based on the sector's aggregate relative strength score and breadth.

4. Regime & Volatility Context (20% Weight):

• Daily Candle Position (5%): Where the daily price closes relative to its intraday high-low range.
• Market Regime Alignment (10%): Match between the trade direction and Nifty 50 SMA trend.
• VIX Risk Contribution (5%): Graded risk buffer. VIX $\le 15$ awards a full 5 points, whereas VIX $\ge 25$ cancels all volatility points.

Grading Scale

• Grade A (Conviction $\ge 90$): Strong Buy. Peak technical-fundamental alignment.
• Grade B (Conviction $75\text{ to }89$): Buy. Reliable trend setup with solid fundamentals.
• Grade C (Conviction $60\text{ to }74$): Watchlist. Structurally sound but lacks immediate setup triggers.
• Grade D (Conviction $< 40$): Avoid. Weak fundamentals, negative regime, or poor setup metrics.

5. Walk-Forward Testing & Dynamic Parameter Tuning

To ensure that performance metrics are not the result of historical curve-fitting or hindsight bias, the engine runs rolling Walk-Forward Testing (WFT).

The Walk-Forward Process

1. In-Sample (IS) Optimization:

• Slices historical data into an in-sample window (adaptive 288 days or 80% of data).
• Executes a grid-search parameter sweep to identify the configuration that maximizes Calmar Ratio and Net Return.
• Parameters tuned specifically per symbol:
• max_stop_atr: Maximum ATR stop-loss distance (1.2x to 1.5x)
• min_reward_risk: Target profit threshold (1.5R to 2.5R)
• friction_min_target_pct: Minimum trade reward buffer to override fee friction (0.2% to 0.5%)
• allow_positional_hold: Overnight holding permission (True / False)

2. Out-of-Sample (OOS) Forward Run:

• Extracts the optimized parameter settings from the IS phase.
• Runs a forward simulation on the subsequent out-of-sample window (adaptive 72 days or 20% of data).

3. Rolling Stepping:

• Steps forward by the OOS interval, repeating the optimization and testing loop. The aggregate equity curve represents only Out-of-Sample (unseen) execution.

6. Risk-Adjusted Return Analysis (Sortino vs. Sharpe Ratio)

We evaluate all backtests using the Sortino Ratio rather than the Sharpe Ratio.

Sharpe Ratio Limitations in Trading

The Sharpe Ratio calculates risk-adjusted return by dividing excess returns by total portfolio standard deviation:

$$\text{Sharpe Ratio} = \frac{R_p - R_f}{\sigma_p}$$

• The Problem: Sharpe treats all volatility as risk. If a strategy experiences massive, explosive upside runs, the standard deviation ($\sigma_p$) spikes, which decreases the Sharpe Ratio. This penalizes strategies for positive, highly profitable volatility.

The Sortino Solution

The Sortino Ratio resolves this by penalizing only downside deviation:

$$\text{Sortino Ratio} = \frac{R_p - R_f}{\sigma_d}$$

$$\text{Downside Deviation } (\sigma_d) = \sqrt{\frac{1}{N} \sum_{i=1}^{N} \min(0, R_i - T)^2}$$

• Where: $R_i$ is daily returns, $T$ is target/minimum acceptable return (assumed at 0%), and $R_f$ is risk-free rate (assumed at 0%).
• Benefit: Sortino isolates downside risk. A high Sortino ratio indicates that the strategy historically maximized returns relative to downside volatility, without being penalized for large winning trades.

7. System Assumptions & Simulation Friction

To keep results realistic for capital allocation, all backtests enforce strict execution constraints:

• Friction Rate: A flat 0.16% per round-trip trade is deducted from all PnL. This aggregates standard brokerage commissions (0.03%), execution slippage (0.05%), and government/regulatory taxes (STT, GST, exchange fees).
• Execution Timing: Trades enter at the close of 5-minute trigger bars to match institutional execution constraints.