Best indicator to trading at all-time high

F&O Market

Markets are making fresh highs each day However, every fresh trade we take does with realization that we have already run up a lot and that is scary.How to deal with this?

They say that market is the best indicator of at least the immediate course of action. Price already has a lot of analysis on it, but price alone is not enough to say that rise today has a capacity to indicate rise tomorrow.

Then we turn to Volume which is another market data. Just like price for underlying stock or future we can not really find out whether rising price and rising volume is more due to previous sellers buying back in hurry or fresh buyers entering.

So, we turn to options. Where we have 2 different types of options separate for Bullish and Bearish bias. We all know Call Option Buyers express Bullish bias and Put Option Buyers express Bearish bias.

Here volume can be really helpful if we can somehow turn both Call and Put volumes into one comparable Indicator. There is a way to do this. Presenting Volume PCR (Put Call Ratio).

Volume PCR = Total Put Option Volume / Total Call Option Volume

Here Total Volume refers to the volume of all strikes, all expiries of Call or Put options. Higher the ratio means higher volume of Put options compared to Call Options. On the other hand, lower ratio means lower volume of Put options compared to Call Options.

There are 3 key characteristics that we should consider making use of this trade data.

1. Historically we have seen that dominance of either Call or Put volume continues for a short period of time. This is just like short term trend that continues for at least a few days before the reversal or pull back takes place.

2. While the stocks can go up and up. This means that 10 can become 100 and 100 can become 1000. Volume PCR is such trade data that moves only in range. For example, for Nifty it has been seen moving in a fine range of 0.7-1.3 in last 3 years.

3. Last and the most important characteristic of Volume PCR is that it is negatively correlated with the underlying. This means that Volume PCR often rises during the fall in the underlying and often falls during the rise in the underlying.

Now consider,

Negative Relationship of Volume PCR & Stock + Range Bound Nature of Volume PCR

This combination can help us in gauging short-term insight about the small ups and downs within a long-term trend. Now, if we simply follow this and as soon as we see Volume PCR at a recent bottom (where there are higher chances of it rising from there), we create a cautious view for the underlying. This is because rising Volume PCR is always seen alongside falling underlying.

Volume PCR can help you get the first sight of the turnaround. With this indicator one can trade confidently with a solid exit strategy in place.