Trading Strategies Using Technical Analysis
- Thread starter SwingKing
- Start date
- Tags trading strategies
Someone recently had asked me about valid interpretation of Open Interests in Options. I just read a very good explanation of the same and thought of sharing it here. I am highlighting the important points in bold.
" Open interest represents the total number of option contracts currently open and is a measure of liquidity in a particular options class. In other words, open interest is a figure that reflects the number of contracts that have been traded but that have not yet been exercised or liquidated by an offsetting trade. When you trade an option, you may in fact be creating a new option contract. Both buying and selling options will increase the open interest figure, providing the action opens a position. Conversely, buying or selling to close a position will cause open interest to fall. If one side is opening a buy position and the counterparty to the trade is selling his existing bought position, then the open interest will not change.
Looking at the open interest, there is no way of knowing whether the options were bought or sold. However, the figure can be compared with the volume of contracts traded on a given day. When the daily volume exceeds the existing open interest, it suggests that trading in that option was unusually high. Open interest also indicates the liquidity of an option. When options have high open interest, it means they have a large number of buyers and sellers, and an active secondary market will increase the odds of getting an order filled at a decent price. Generally speaking, the larger the open interest, the easier it will be to trade that option at a reasonable bid-ask spread. "
Tc
" Open interest represents the total number of option contracts currently open and is a measure of liquidity in a particular options class. In other words, open interest is a figure that reflects the number of contracts that have been traded but that have not yet been exercised or liquidated by an offsetting trade. When you trade an option, you may in fact be creating a new option contract. Both buying and selling options will increase the open interest figure, providing the action opens a position. Conversely, buying or selling to close a position will cause open interest to fall. If one side is opening a buy position and the counterparty to the trade is selling his existing bought position, then the open interest will not change.
Looking at the open interest, there is no way of knowing whether the options were bought or sold. However, the figure can be compared with the volume of contracts traded on a given day. When the daily volume exceeds the existing open interest, it suggests that trading in that option was unusually high. Open interest also indicates the liquidity of an option. When options have high open interest, it means they have a large number of buyers and sellers, and an active secondary market will increase the odds of getting an order filled at a decent price. Generally speaking, the larger the open interest, the easier it will be to trade that option at a reasonable bid-ask spread. "
Tc
Importance of Getting in and Getting out of a trade
Has it ever happened to you that as a trader you chase a stock and it continues to give you whipsaws. You finally make up your mind to give up on that stock and ironically find it rallying on the very next move. I guess, this has happened to each one of us in our trading career. Therefore, as traders what can we do to counter this? Before we touch upon this topic in detail, I'll assume that everyone reading this has a distinct advantage over the markets in form of systems or methodology. By distinctive advantage, I mean a system which does not depend on specific market conditions to work. So, let's begin !
Well, if you think about this issue in detail, this is more of a psychological issue than a system issue. As soon as we get a couple of loss making trades, we begin to look at our P&L statement. Furthermore, we begin to extrapolate the P&L "if" we were to loose a few more trades. Believe me, if you want to be successful, then don't do this ! We all go through phases where the stocks just don't move and eventually when they do move, we are ultimately out of it. Most of you who follow this thread, must have noted on many occasions that I keep reversing my trades till I find that stock in my favor. Currently, I am doing the same with India Bulls Real estate. I will keep reversing my positions till that stock fits my scaling in and profit booking criteria. It's psychologically tough, but who told that markets rewards one for taking easy decisions? When we are wrong, we want to make sure our losses are small and when we are right, we need to make sure our profits are relatively large.
There are few things in trading which are not documented well enough. Out of those, the topic of getting out and getting in is one. Folks, as far as our system has a positive expectancy, we should not be bothered with the whipsaws and the draw downs. To be successful in this, never ever forget the 2% risk management rule. If you don't let one trade take more than 2% of your portfolio, believe me you'll be soon taking your account in the whole new direction. That is, towards profits.
If you intend to become a good trader, you have to incorporate this in your trading plan. Be relentless, don't think about potential losses, let them show up and then apply the risk management rules. Don't trade what you think, trade what you see.
Tc
Has it ever happened to you that as a trader you chase a stock and it continues to give you whipsaws. You finally make up your mind to give up on that stock and ironically find it rallying on the very next move. I guess, this has happened to each one of us in our trading career. Therefore, as traders what can we do to counter this? Before we touch upon this topic in detail, I'll assume that everyone reading this has a distinct advantage over the markets in form of systems or methodology. By distinctive advantage, I mean a system which does not depend on specific market conditions to work. So, let's begin !
Well, if you think about this issue in detail, this is more of a psychological issue than a system issue. As soon as we get a couple of loss making trades, we begin to look at our P&L statement. Furthermore, we begin to extrapolate the P&L "if" we were to loose a few more trades. Believe me, if you want to be successful, then don't do this ! We all go through phases where the stocks just don't move and eventually when they do move, we are ultimately out of it. Most of you who follow this thread, must have noted on many occasions that I keep reversing my trades till I find that stock in my favor. Currently, I am doing the same with India Bulls Real estate. I will keep reversing my positions till that stock fits my scaling in and profit booking criteria. It's psychologically tough, but who told that markets rewards one for taking easy decisions? When we are wrong, we want to make sure our losses are small and when we are right, we need to make sure our profits are relatively large.
There are few things in trading which are not documented well enough. Out of those, the topic of getting out and getting in is one. Folks, as far as our system has a positive expectancy, we should not be bothered with the whipsaws and the draw downs. To be successful in this, never ever forget the 2% risk management rule. If you don't let one trade take more than 2% of your portfolio, believe me you'll be soon taking your account in the whole new direction. That is, towards profits.
If you intend to become a good trader, you have to incorporate this in your trading plan. Be relentless, don't think about potential losses, let them show up and then apply the risk management rules. Don't trade what you think, trade what you see.
Tc
JK,
1. Focus on your thought process - This means focus on your methodology, your system. If your system is good, it will always chase the smart money. If you are able to do this, you will be able to make money. Don't think what they will do, just keep going with the flow.
2. What the market is telling your right now - This means look at the Nifty, Bank Nifty and ask yourself what do you see? Does the Nifty tell you it's going to correct? Don't think it might correct. Let it tell you in person. Once it does, reverse your positions. For eg. As of now if I ask Nifty to short it, I get an answer where Nifty tells me I am a fool. Hope you get my point. It's communication, its logic and its all about being in the present.
Tc
1. Focus on your thought process - This means focus on your methodology, your system. If your system is good, it will always chase the smart money. If you are able to do this, you will be able to make money. Don't think what they will do, just keep going with the flow.
2. What the market is telling your right now - This means look at the Nifty, Bank Nifty and ask yourself what do you see? Does the Nifty tell you it's going to correct? Don't think it might correct. Let it tell you in person. Once it does, reverse your positions. For eg. As of now if I ask Nifty to short it, I get an answer where Nifty tells me I am a fool. Hope you get my point. It's communication, its logic and its all about being in the present.
Tc
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