Trading Nifty Options on trend reversal.

#1
Uptrend or downtrend, it's technically compulsory to reverse trend as profit booking is inevitable. If a trader longs in an uptrend, he will sell to book profit. And if he shorts in a downtrend, he will buy to book profit. The million dollar question is how will we know that the current trend is reversing? There are a lot of indicators for analysing trend reversals. But let's just consider the simplest one which everyone can do. I will just recommend a real time tip here as an example:-
Starting wednesday, the 18th of June, 2008 , Nifty has been closing in the red as -70.60(18th), -78.15(19th), -156.70(20th) & -81.15(23rd) consecutively, keeping nifty at 4266 level. A support was witnessed at around 4226 today the 23rd June & bounced itself closing at 4266.40. So, buying an ITM Call (NiftyOptiDx26Jun2008CE4200 or CE4250) has a good winning probability with less risk involved because it's high time those shorts must be covered up. However, we must have strict exit targets since this technical bounceback may not last long due to the current disturbances (inflation, bad global cues, political uncertainty).

Important : Before entering this trade, see for Buy>Sell volumes in Nifty Futures & Nifty ITM Options Calls and also check for double bottom formation with higher lows trendlines in Nifty intra-day chart.
 
#3
There are plenty of examples in Nifty Index chart (Jap.Candle) where trend reversals signs, though theoretically correct, failed to sustain. While in a Decline movement there are instances where reversal to current downtrend was given followed by a white candle but it did not sustain. In such a case a trader holding a PUT OPTION may be misguided and hurriedly square-up his position. But in next day to his utter surprise, the previous downtrend resumed to continue. So these may be called the 'false reversal sign'. In such case, I have found the MACD appears most trusted tool to get confirmation of sustainability of such temporary reversal sign, some friends say " a 'bullish pullback' inside a Bear-run". Afterall, the money market is driven by speculative mood of the participants which in turn get impacted by macro factors, which are prevalent now. Though all the prices of stock have reached the rock-bottom stage, some amount of Accummulation has started very slowly, the issues like - political, inflation and crude prices are pushing away the traders from the market. Just see the volume traded in all counters on 20th & 23rd of June.:mad:
 

AW10

Well-Known Member
#4
My 2 Cents/ Paise worth.
1) In bear market, we are going to see more oversold signs (didn't we see RSI above 80 in RPL/ RNRL for days in Q4 last year). That doesn't mean that trend is going to change. Dear, lets wait and hear the market's telling us that it has changed the direction. As mentioned MACD is reliable but it is lagging indicator and it will not turn +ive for next few days.
2) Buying a call 2 days before expiry is risky bet. The option premium falls at the highest rate as they near the expiry. Do you think the option seller are dumb and they are going to sell you options at low premium, when they also know the mkt is oversold and they have higher risk of ending in the money ? In such cases, option permium shoots up.
3) Lets not forget that FED meeting is due on Wednesday so most likely US mkt will not give any clue to our market (it has already given a doji close on Monday).
 
#5
My 2 Cents/ Paise worth.
1) In bear market, we are going to see more oversold signs (didn't we see RSI above 80 in RPL/ RNRL for days in Q4 last year). That doesn't mean that trend is going to change. Dear, lets wait and hear the market's telling us that it has changed the direction. As mentioned MACD is reliable but it is lagging indicator and it will not turn +ive for next few days.
2) Buying a call 2 days before expiry is risky bet. The option premium falls at the highest rate as they near the expiry. Do you think the option seller are dumb and they are going to sell you options at low premium, when they also know the mkt is oversold and they have higher risk of ending in the money ? In such cases, option permium shoots up.
3) Lets not forget that FED meeting is due on Wednesday so most likely US mkt will not give any clue to our market (it has already given a doji close on Monday).
Can you please tell me an indicator that gives an accurate entry signal for a profitable trade in Nifty options?
 

kkseal

Well-Known Member
#6
Very difficult to catch in this capitulative C5 phase 4180-4175 was an excellent bounce level today but did not last Let's see how the Dow behaves & 4125, 4100 for the Cow tomorrow :)
 

AW10

Well-Known Member
#7
Can you please tell me an indicator that gives an accurate entry signal for a profitable trade in Nifty options?
There is no "Holy Grail" in trading. I wish, I had known the answer of your question. In early stage of my trading career, I spent enough time searching for that MASTER Indicator but couldn't find one. Let me know if you find one.

Now I play the probability game (thanks to the basics of probabilty that I learnt in school). When probability and expected reward is in my favour, I pull the trigger else wait for till the time it happens.

Happy Trading.
 

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