Today’s blog post is bound to captivate your interest as we go further into the intriguing world of market predictions. Many individuals, including myself, have pondered a common question: if someone buys, then someone must sell; otherwise, no transaction occurs. Consequently, how can we determine whether a market position is long or short? This query becomes even more significant when considering derivative data. Over the past 15 years, I have dedicated myself to studying this subject, building upon the research initiated by my team member, Bhavin. Bhavin, an avid follower of our content and applications, introduced me to this concept. Through meticulous tracking and analysis, we aim to uncover the precise information that can assist in predicting market fluctuations. The forthcoming blog will shed light on the background of this theory, enlightening readers with valuable insights into market behavior and the interpretation of derivative data. Stay tuned for a captivating read!
Over the course of the past 15 to 20 years, a fascinating study has been conducted, delving deep into the dynamics of market control. This study stands out as a rarity, as few research endeavors surpass the three-year mark. However, the significance of understanding who holds the reins in the market is fundamental to this strategy. Allow me to simplify this concept further. When a trade occurs and the price rises while the Open Interest (OI) also increases, a key principle comes into play. OI represents the number of new contracts entering the system when a new buyer and seller converge. Now, imagine an instrument priced at 100 rupees. Initially, a buyer is willing to pay 101 rupees, but the seller hesitates, deeming it too risky to sell. However, as the buyer persists and raises the bid to 102 rupees, it becomes evident that the buyer is in control. This scenario signifies a “long built-up” situation, where the price rises, the OI increases, and long positions dominate the system. Conversely, a “short built-up” scenario unfolds when the price falls, yet the OI rises, indicating an influx of short positions as sellers actively engage in new transactions. In our forthcoming blog, we will explore these four possible scenarios in more detail, providing valuable insights into market dynamics and the determination of control.
Now a very big concept comes that is there any difference between profit booking and downtrend? In profit booking, the market goes down. And when we say that there is a downtrend in something, the market goes down. So what is the difference? So in downtrend, people are selling in fear. And in profit booking, the price went up. The profit book price went down. And after that, basically, the uptrend may have continued. Exactly. So I will summarize what you said in a few words. Like a pullback. So profit booking is temporary. Whereas, downtrend is permanent. Till Newton’s law, everything will remain there until something comes and moves it. So the same thing applies there. Downtrend will remain there till a reverse force comes and moves it. Which means that contra data is being built. So that is why pullback, as a rule, I have followed in my life that I never trade pullback. You will not trade the pullback. But you trade after the pullback. I will trade after the pullback. But I will never trade the pullback. If you say in a market of fast, go and take a short because it is falling today, I will not take it. Or if you say in a market of a slow, go and buy it because it is going to bounce back, I will not take it. You are not going to go against the trend and you should do that. According to me, that is also the same. So, this is the whole theory. Now these two terminologies come that if open interest is falling in the market, means the old contracts are getting unwind. And the price is going down. Means what is it? The people who bought it earlier, they are now squaring off. We call that long unwinding.
Let’s explore the fourth terminology: short covering. This phenomenon occurs when a trader initially takes a short position but subsequently decides to close it, either to secure profits or limit losses. As a result, the price starts to rise, and the Open Interest (OI) declines. This process is known as short covering.
Now, it’s crucial to address a common misconception. Merely analyzing a single day’s data is insufficient for accurately understanding and predicting market movements. In my opinion, a more comprehensive analysis requires observing data over a longer timeframe, such as 20 trading days or even an entire cycle leading up to an expiry. For positional trades spanning one or two months, it becomes necessary to examine data over a period of 60 days.
By studying data in clusters or cycles, we gain a more profound understanding of market dynamics. It’s important to emphasize that these concepts are not derived from single-day observations. Instead, they emerge from analyzing data across multiple days, allowing us to identify patterns and cycles.
Therefore, it is advisable to avoid making hasty judgments based on isolated daily data. By taking a broader perspective and considering extended periods of market activity, we can gain valuable insights into cycles and make more informed trading decisions.
When it comes to analyzing the market and predicting its direction, many traders often seek answers from others. It’s a common question that friends and fellow traders ask each other: “What is the market like today?” However, the reality is that each trader’s perspective and equation with the market may differ.
To address this, it is crucial to understand how to forecast market trends independently. Let’s consider a practical situation: winning the lottery. If we could accurately predict the market’s every move, there would be no need for any effort. However, the goal here is not to rely on luck or chance, but rather to achieve a realistic and logical approach to trading.
The aim is to achieve a strike rate of around 65% to 70% by analyzing and interpreting relevant data. This approach allows for increased accuracy in trade execution. When you base your trades on data-driven insights, you build confidence in your decisions. Even when you encounter losses, you learn from them and refine your strategies based on the observed data.
Trading based on gut feelings or random guesses does not provide the same level of learning or improvement. Therefore, trading on data becomes crucial for achieving consistent and reliable results. By embracing this approach, you can expect a higher strike rate and the ability to take more positional trades lasting from a few days to a couple of weeks.
However, it’s important to note that this analysis should not be applied immediately after the expiry of a contract. During the rollover period when one contract expires and a new one begins, the data may not be as reliable. Rollover percentages are typically around 65% to 85%, indicating that a significant portion of positions is being rolled over to the next contract. Consequently, it’s advisable to avoid making trading decisions solely based on data from the day following the expiry.
When analyzing the market using the buildup tool, it’s important to consider various factors to gain a comprehensive understanding. First, we have the option to analyze individual scripts or stocks. This allows us to delve into specific companies and assess their market trends.
Next, we need to recognize that relying on a single day’s data is insufficient for accurate analysis. Therefore, we must expand our perspective and consider data over a longer timeframe. This leads us to the concept of cycles, where we observe patterns and trends over a series of trading days, typically around 20 days or even an entire expiry period.
Furthermore, it’s essential to consider the quantum or the magnitude of trading positions. The buildup tool provides insights into the historical Open Interest (OI) in futures, which helps us understand the amount of money invested in a particular stock or contract. By examining the quantum, we can determine the significance of a particular position and its impact on the overall market.
Additionally, when it comes to sector analysis, some traders prefer a top-down approach. They first evaluate the sector’s performance and identify areas of strength, such as pharmaceuticals or consumption. From there, they can then select specific stocks within the sector to trade.
When using the Buildup tool for intraday analysis, the focus is primarily on Nifty and Bank Nifty. By examining these indices, we can gauge the market sentiment and identify potential trading opportunities. In the case of Nifty, a short position has been established as the price has fallen, accompanied by a 35% increase in Open Interest (OI). This indicates that new participants have entered the market and taken short positions, resulting in the price decline. Similarly, Bank Nifty has experienced a 0.1% drop in price, coupled with an 8.5% increase in OI, suggesting a rise in short positions in this sector as well.
To further analyze the market, we can utilize the Future OIH tab, which provides historical data for Nifty and Bank Nifty over the last 20 trading days. By selecting the Absolute OIH option, we can observe the changes in OI from one day to the next. The color-coded representation helps identify the dominant trading activity: red indicates short positions, green represents long positions, blue signifies long unwinding, and yellow denotes short covering.
Analyzing this data reveals a consistent presence of red, indicating a prevalence of short positions over an extended period. Combined with instances of short covering, it becomes evident that the market has been on a downward trajectory. This insight allows us to develop a trading strategy based on the observed data.
The fundamental principle I adhere to is that after examining the data, it is crucial to approach trades with a clear perspective. Over the course of my experience, I have encountered numerous analysts, including those with exceptional skills. However, one aspect remains constant: taking a trade based on gut feelings or speculation rarely yields positive outcomes. Instead, it is imperative to base decisions on concrete data.
In the market, there is a common misconception that one can consistently predict the bottom and top ticks of a stock. Traders often strive to be the first to buy at the bottom and sell at the top, believing that this approach will yield high profits. However, in reality, consistently achieving such precision is extremely difficult.
Attempting to identify the bottom of a falling stock and consistently buying at that point often leads to poor results. The market trend may continue downward, and traders find themselves going against the prevailing trend repeatedly. This approach diminishes the overall strike rate and leads to losses.
Additionally, the notion that the market can be influenced or changed by individual traders is a fallacy. Regardless of the amount of capital a trader possesses, whether it is 1 crore or 100 crores, it does not impact the market as a whole. Market movements are determined by the collective forces of supply and demand, not by the actions of individual traders. Therefore, the idea of a trader being able to change the overall trend is unrealistic.
Another question that often arises is whether there are market operators who manipulate stock prices. While it is true that manipulation can occur in small stocks, the major indices such as Nifty and Bank Nifty, as well as the top 20 stocks, are not influenced by any operators or manipulative entities. Market forces and the interplay of supply and demand drive the movement of these stocks.
Understanding these fundamental principles is crucial. There is no ghostly operator orchestrating the market. Instead, it is governed by the forces of supply and demand, which can be likened to a seesaw where the weight on either side determines the direction. Due to the vastness and complexity of the market, consistency is hard to achieve. Trends can change quickly, and no individual trader has the power to alter the overall market direction.
To navigate this dynamic environment successfully, it is important to adopt a reactive approach. Instead of trying to create or predict trends, traders should focus on responding to what is happening in the market. Being a participant in the market means observing and analyzing the market forces at play, rather than attempting to manipulate or change them. By being reactive and responding to market movements, traders can make informed decisions based on current conditions, increasing the likelihood of successful trades.
In trading, it is common for people to try and predict the exact bottom or top of a market. They argue that trying to time the market perfectly is difficult, with a success rate of only around 25%. Instead, they propose being the second participant in the market movement.
We should wait for a pullback after a significant drop in price. For example, if a stock falls from 20 to 10, they will wait for it to decline further to 18 or 16 before entering the market. By doing so, they believe their success rate increases to around 65-70%.
This approach is based on practical observations and personal experience. They suggest that trying to consistently identify the exact bottom or top is challenging and often results in underperformance. Instead, by changing one’s mindset and focusing on participating in the second move, one can increase their chances of success.
Analyzing the data of the Nifty index can provide clear indications of market sentiment. As long as the market conditions do not change, the bias remains on the short side. Additionally, they highlight the significance of the highest call option as a strong resistance level. They suggest selling at this point during a downward trend.
Understanding the market and its dynamics can give traders an edge over others who rely solely on their intuition. By analyzing data, particularly open interest, one can gain insights into the buying and selling patterns in the market.
Furthermore, let’s take a look at the concept of trading cycles. By recognizing and understanding these cycles, traders can capitalize on them. However, further details on how to trade these cycles are not provided in the passage.
In the world of stock trading, it is essential to analyze and interpret market trends to make informed decisions. One strategy used by traders is profit booking, which involves taking profits by selling a stock that has experienced a significant price increase. While profit booking is commonly associated with a long blue bar, it is important to understand that profit booking can occur even without a preceding long position.
In certain situations, the market may be in a sideways phase, lacking a clear trend or direction. During such times, traders may not have a specific view on a particular stock. However, it is still possible to engage in profit booking. This can be achieved by carefully monitoring the stock’s performance and identifying favorable opportunities to sell and lock in profits.
By observing the data and analyzing the market, traders can develop their perspectives on individual stocks. It is important to maintain a comprehensive view on every stock, even during periods of market uncertainty. By keeping track of various indicators and patterns, traders can make better-informed decisions and adapt their strategies accordingly.
In the world of stock trading, identifying trends and patterns is crucial for making informed investment decisions. One approach to analyzing stock market data involves the concept of cycles, which can provide valuable insights into potential trading opportunities. By focusing on specific combinations of colors in the data, such as green and blue or red and yellow, traders can determine whether a stock has exhibited a consistent cycle of long-long unwinding over a certain period.
To implement this strategy, a look-back period of 20 days is considered, with the latest data on the left and older data on the right. The aim is to identify stocks that have displayed a cycle of long-long unwinding for at least 14 out of the past 20 days. By analyzing the color combinations and patterns within this timeframe, traders can identify stocks that exhibit a consistent trend of long positions being unwound.
Using this innovative tool, traders can quickly identify potential investment opportunities based on the presence of recurring cycles. By understanding which stocks have consistently shown long-long unwinding patterns, traders can formulate strategies to capitalize on these trends and make informed decisions regarding their investment portfolios.
In the realm of stock trading, the ability to make informed decisions based on data is highly valued. A powerful tool in the trader’s arsenal is the concept of add-on indicators, which serve as the proverbial almonds in a refreshing cold drink. These indicators provide additional confirmation and enhance the accuracy of trading views derived from other sources.
When using add-on indicators, one can leverage the expanding green line as a signal for scalping, a short-term trading strategy lasting only 10-15 minutes. Traders who engage in such rapid trades closely monitor the market’s breadth, which refers to the relationship between price and open interest (OI) of a stock. This approach offers advantages over traditional methods like advance-decline analysis, as it provides more detailed insights into market dynamics.
By incorporating the concept of build-up into scalping strategies, traders can extract valuable information from the data. They can determine whether the market is exhibiting an expanding long trend, indicating an upward movement. This technical analysis technique allows traders to capitalize on short-term opportunities and make quick decisions based on the derived data.
The add-on indicator theory has long been employed by traders seeking consistent profits with a strike rate of 60-70%. By following the insights provided in this blog, traders can easily apply this concept within the comfort of their own homes, spending just a couple of minutes on analysis. By embracing a data-driven approach, traders can transition from relying on gut feelings to making informed decisions based on derived data. This empowers them to trade with increased confidence and potentially achieve greater success in the stock market.