General trading topics Patterns

Assess the mood of the market.

Today we thought of writing a blog post on a very crucial concept which is not so popular but can be really helpful if you get a sense of what it is and why it’s of importance.

In this post we try to explain two market phases which you might be already aware but maybe you’re not giving enough significance to them in making your trading decisions.

Also worth a mention, this specific post helps you assess if the market can move significantly from the given point or stop and spend time in other words consolidate.This can help an option trader quite a lot.

Let’s dive-in

Just think from a common sense perspective why should market move one sided and significantly? Well there can be a hell lot of reasons which are driving the move but you will only see the reasons in the after market news headlines unless there’s a big event scheduled and known.

Irrespective of many reasons which influence the market ultimately it should translate into actual buying and selling for the market to move significantly and that buying and selling should be initiative which means new positions being created in expectation of something big that’s what drives the market right?

With Δ OI you can identify these fresh and aggressive buildups without any confusion and that helps you decide if the market is going to extend the move further or sit back and relax i.e. being range stuck.

As an example, say nifty has seen heavy buying at the open and rallied 60-70 points from the opening prices. Now it’s not always a case that this +60 will be +120/150 by the EOD. How do we know if it’s going to extend the rally? If we see some aggressive buildups at prices after +70 from open then that’s an indication of further rise.

But what’s the trigger for it to not move significantly? Similar to what we understood above this case is just the opposite of it i.e. we shouldn’t be seeing aggressive fresh buildups and also see some unwinding happening suggesting that these price moves are being used to get out of existing positions. In this scenario the market is most likely to spend time in being range stuck which is time to play your delta neutral option spreads.

In the nifty example above, there are no fresh buildups and you get to see some unwinding after that 70 points rally that’s an indication that the rally might stop around those prices in the absence of fresh buying.

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