We have written few posts explaining about Δ OI and how to use it but our users requested to publish some content which can help understand how to use this information to actually trade and here follows our example from asian paints in which we explain how could this information be used in your trading.
Before we move on to the actual discussion, we want to list down the steps you should follow in arriving at a trading decision
Step 1: Identify which side the big players are trading i.e LONG or SHORT.
Step 2: Confirm if that action of the big player is actually being respected by the market
Step 3: Take entry around the entry price of the big player and in the direction of the big player.
Step 4: Set Stop loss and target based on your risk profile say 1:1 or 1:2.
Now let’s apply these steps to our example which is Asian paints.
Step 1: On review of data pertaining to asian paints from 15th January 2020 until 17th January 2020 on a 10 minute interval we have identified the biggest quantity of 161k (image below) on 15th January at 10:00 AM Which indicates a short buildup at an average price of 1843 as can be seen below
You can review the data from 15th January until 17th January and can confirm that this is the biggest addition in this period.
There is one more important note worth mentioning here is that it is preferable to see atleast 0.75-1% of average cumulative 12 months OI as a quantity that can influence a particular instrument. For Asian paints that turns out to be approximately 8.8 million shares and in this case we have seen a ~2% addition within 10 minutes on 15th January 2020 as seen from the image above.
It is preferred that you see fresh buildups than unwinding for significant movements to follow so keep this in mind when reviewing the data
On review of data you might end up not finding the big players in those cases just move on to another instrument.
Step 2: Confirming if the action of the big player is influencing the market
If you observe the chart above price has been taking resistance just above that entry price of 1843 and that’s what you need as confirmation that it’s actually playing out.
One more thing worth mentioning here is that if you see an opposite action happening i.e. in this case if you see Significant short covering anytime after that buildup and before you take a trade then avoid trading this signal.
Step 3: Taking an entry
Once you confirm that price is inline with how you want it to behave, It’s time to take an entry around the entry price of the big player and here in this case it was 1843 and you could have taken an entry on 17th of Jan in the morning by 11:00 AM. You might have a different view here on which time you would have taken this but we are quoting this as an example.
Step 4: Set stop loss and target.
Stoploss and target always depends on the risk you want to take and atleast 1:1 would be a favourable bet.
For example if you are a day trader you can put a stop loss of say 10 points which is above the previous swing high of 1853 considering your entry is at around 1843 and a target of 1833 for a 1:1 trade and 1823 for a 1:2 trade.
If you are a positional trader you can have a stoploss in %terms say 1% stoploss and 2% target or something similar.
Once you get sense of this method of analyzing and getting into trades based on this you will be able to do big profit making trades but we suggest you to start small and scale it up slowly.