Why I prefer to follow Open Interest data over Price Action

Open Interest, A simple setup that saved me lakhs of rupees. A detailed explanation of why I prefer Open interest over price action.

Why I prefer to follow Open Interest data over Price Action
Photo by Ishant Mishra / Unsplash

Hello friends, today I want to tell you why I give more importance to open interest data over price action.

When I started trading 12 years back, there were very few resources from where you could learn and create systems.

My Journey to option strategies

Whatever you want to achieve comes with your experience. In my early days, I used to trade in futures. And I was in a state where I was consistently generating alpha.

But one of the drawbacks with futures is: it's an overnight risk. I came from a very humble background where I was limited capital and I don't want to lose it.

I started trading intraday but later I realised that if I want to make good money I have to learn how to utilise the whole trend.

I love to read books and in many books, I have read that if you want to succeed in this market, then learn how to cut your loss by making trades early and holding the profitable ones.

But again intraday, you would have a limited range that you can catch and you will miss the maximum profit that comes with overnight gap-ups or gap-downs.

But holding a future for overnight when you have limited capital required real guts. That I don't have. Seriously! I can sit without any trade but can't take risks that I can't afford to lose.

I always believe in a process and have educated my mind in such a way that before entering any trade, I remind myself that it is a loss-making trade and that I need to save myself from losing a lot of money.

It helps me to create a backup plan even before taking entry into a trade. So that I can execute it when things go against me.

One more thing I want to share here is that most traders do. They start creating their recovery plan when they are stuck in any trade. You can't make a good plan when you are already in a loss-making trade. Because whatever you create, it involves your emotions.

And any plan that builds on emotions can never succeed. So I don't want to trap myself in my own emotions.

That's the reason taking a future position overnight looks like suicide for me.

I started to find a way so I can reduce my risk or you can say where I can limit/fix my risk. Then I came to know about options and it open a whole new world for me. I started creating options strategies especially delta-neutral strategies.

How I use open intrest to manage my trades?

Now when I start trading options, I came to know about their nature and the factors that derived options pricing.

I learned how to analyse Open Interest data to choose your strike to create a neutral strategy. When I started following Oi data more closely I found that it's noise-less data that one can use to manage their trades.

In trading, entry/exit is important but more important is your trade management. Entry/exit can be wrong and you can make money with that also but if your trade Management is wrong, you can't succeed.

We knew the strategies, we also knew the adjustment but if we don't know when to initiate the adjustment or when to react actually, everything goes in vain.

In price action, there is lots of noise like fluctuations due to domestic or international events, unnecessary demand supply created by operators, face breakouts, false breakdowns etc...

In other words, you can say there are lots of noise and if you want to be a successful trader you have to avoid that noise.

Open Interest data is removing the noise

Price action shows what happened in past and helps us to predict the future. Now when you are trying to predict anything, it's a 50% chance that either you will be right or wrong. There is no other outcome except that.

On the other hand, Open Interest Data is telling us what is happening in the market right now.

For example, Nifty opened a gap-up now what is happening in the market? People have started their positions at higher levels or they are still holding them.

If they are shifting their position to higher levels that means they are opening the doors to upside levels but if they are not shifting their position that means they are still very much convinced that nifty will not sustain on higher levels and it will fall.

So when we are following Open Interest data, it gives us a signal that we need to react or it's just a fake rally.

Let's understand this with one more example. Below is the open chain of Nifty:

Nse Option Chain - Nifty

Here you can see that 19700 is a good resistance and you have sold a 19700 call here. Now if tomorrow nifty opened the gap up and traded at 19730. What should you do?

If you are following price action then you have to adjust your position but as we knew that 80% of breakouts are false breakouts. And if we do that adjustment and it falls then we booked an unnecessary loss. So do we need to wait?

We can't wait though. Because if it's a true breakout and Nifty keeps increasing then the loss will be huge if we are not doing any adjustments.

That is where I take the help of Open Interest data to make a better decision. If Open Interest starts shifting that means it's a true breakout else it's a false.

This Open Interest data is telling me what is happening right now in the market. Neither it's telling me about the past nor predicting the future, just showing a picture of the present.

Market open gaped -up or gap-down, its past. Its already happned, now what next? Will it sustain or not? Are people shifting their positions or not? These are questions, you will get answered when you start analysing Open Interest data.

So based on the Open Interest data, I can react instead of predict. And if you react instead of predict your odds to make money will increase automatically.

There are lots of simplier examples, where Open Interest had saved me with unnessary adjsutmentsin the last 2 year. So in short we can say that Open intrest data shows are a clear picture about what is happening in the market.

I used this Open Interest analysis to manage my intraday trades.

If you are following me on social media like Twitter or Telegram you should knew that I'm trading with naked selling also based on my trend following setup.

I use this Open Interest data with the combination of PCR Ratio, to manage these positions. And this setup has given me around 80% accuracy in the recent time where fluctuation is high.

To share my Intraday rule based strategies and this trend-following setup, I have created an Advanced course for Intraday Option Strategies, you can access the recordings if you missed to join but want to learn how I use this Open Interest data to manage my trades in the live market.

I hope this article has shown you a clear picture about why I prefer to follow Open Interest data over price action.

In case if you have any query, feel free to type in the comment box. If you like what I'm sharing here, feel free to like and share. It will be a great help.

Have a profitable trading!


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