Moneycontrol
Last Updated : Jul 07, 2018 11:17 AM IST | Source: Moneycontrol.com

Crystal Ball Gazing with Futures Data! Do we chase every longs and short?

Chasing Longs after a recent round of Long Unwinding in a rising market or Shorts after a recent round of Short Covering has been seen having more price potential. Also just like the trading trends, always prefer to trade fresh build-ups than unwinding, says Shubham Agarwal of Quantsapp Private Limited.

Moneycontrol News @moneycontrolcom

Shubham Agarwal

As exciting as trading equity derivatives are, the trade data of already traded F&O is equally insightful of what expectations the market participants are building.

Let’s discuss how keeping a close eye on the publicly available F&O trade statistics can help us in picking up possible winners of tomorrow. Exchange provided trade data would have everything we would want to read the participants’ perspective.

Let us start with simple observation of activities in the Futures market. The data point we are looking at changes in open interest (OI) of futures along with a change in prices of the same. Now with two of these variables, there could be four possibilities.

Rise in OI and Rise in Price a.k.a. Longs, Rise in OI, Fall in Price a.k.a. Shorts, which essentially are fresh build-ups.

While similar possibilities exist in a reduction in OI or unwinding. Fall in OI and Fall in Price a.k.a. Long Unwinding, Fall in OI and Rise in Prices also known as Short Covering.

Empirical evidence suggests that just like price trends in the underlying, more often than not, we would have similar trends in the Open Interest Build ups as well.

To clarify, many times in a rising market, one would witness the rise in open interest with the rise in prices, in other words, Long Build-up, which is generally accompanied with fewer unwinding instances as well when there is a respite in the underlying prices.

Similarly in a falling market, one would observe Shorts accompanying the falling prices while the unwinding is witnessed in the respite, which gets popularly labelled as short covering rallies.

So in the sense, just like a trend of Impulsive moves and correction, futures OI too would have similar cycles of fresh build ups and unwinding. In a rising market, one would have a Long-Long Unwinding cycle, while in a falling market one would have Short-Short Unwinding cycle.

Now, do we chase every longs and short? Certainly not.

It makes sense to chase the ones where we have larger participation. The incremental open interest of 10 percent or more has worked for me. But, readers are encouraged to make their own magic number based on their own testing.

Also out of the experience, I would say the OI movement shall be neglected if it is coupled with erratic price move of 5%-10%-15%. The larger increment in OI with moderate price change indicates there is more in store for the stock in terms of the price move.

Given the fact that you have narrowed down on the list of stocks to concentrate on, give a quick glance at the recent price history and OI movement.

Chasing Longs after a recent round of Long Unwinding in a rising market or Shorts after a recent round of Short Covering has been seen having more price potential. Also just like the trading trends, always prefer to trade fresh build-ups than unwinding.

We all know nothing is perfect but this is one set of data points that could give you a nice tool for stock selection. This along with the known loss trade set-up using Options can make a very effective trading plan.

Disclaimer: The author is CEO & Head of Research at Quantsapp Private Limited. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jul 7, 2018 11:17 am
Loading...
Sections
Follow us on
Available On