2 factor authentication for intra-day trades: Shubham Agarwal!

Markets have been a lot volatile these days. When the head line trend is not very clear the best strategy is, to limit the trade for during the day only. Intraday trades are good in many ways. However, the best feature is that it does not run a gap risk.

Apart from the opening gap risk, with intra-day trade you can keep an eye and keep tighter stop loss. Most importantly, it is more efficient use of the capital. However, intra-day trading comes with its own set of challenges. It is a race against time.

Also, many filters are required on intra-day trading because if the move is just an over exuberance (over reaction) to some fact, it may not sustain. This is the most important problem.

I know each one of us have our own set of trade set-ups. It may be data driven or technical analysis driven. The reliability of the move in either one of them poses the biggest problem. So, instead of showing 1 of million possible trade set-ups for intra-day trading, let me give you a 2-factor reliability test. This has pushed my reliability score to a good 60%+.

For this factor we need help of Open Interest (OI). Let us understand what OI is first. OI is nothing but the number of contracts open in a particular instrument. Futures contracts are fictitious (not tangible like equities). To measure it, one needs to create some sort of accounting. This accounting is called OI. One Buyer + One Seller create One contract = One OI.

While every new trade is a new volume. Every new trade is not necessarily a new OI. For example, if an existing holder of a Buy position decides to Sell and existing holder of a Sell position decides to Buy Back, the OI will go down.

This helps in deciding whether the move is created by the exiting traders or entering traders. We need the OI along with the Volume to go up with the move in the underlying.

Authenticator is:

OI Up + Price Up for Buy Trades.

OI Up + price Down for Sell Trades.

Factor #2: Volume in Options.

We do have traders making a lot of OI in higher Calls and lower strike Put options. However, if we really want to see if the option traders are expecting a move in the stock or index, we need to observe activity in the Options closest to the current market price, the At The Money Options (ATM).

It is best to see the ratio of Put option volume vs Call option volume in the strikes that are close to the current market price. Easy calculation is to add volumes of the Calls and Puts with 3-4 strikes surrounding the current market price of the stock.

Authenticator is:

Call Volume is 1.5-2 times Put Volume for Buy Trades.

Put Volume is 1.5-2 times Call Volume for Sell Trades.