NIFTY Put Call Ratio

UT/CALL RATIO – THE KEYS TO HIGH PROBABILITY TRADE:

As a trader, what would you give to be able to know what the rest of the market participants are doing at any given point in time. Here is this secret report card, the put/call ratio is as close to actually having this information as a trader is ever going to find.
The PC Ratio measures how many put options are bought versus call options. The formula is very simple to calculate – take the put options Open Interest (OI) and divide by the OI of calls. This data is easily available in Nifty options chain. In the above chart we have automated the same for you so you can get live view of what market is thinking.

How to combine PCR in your trade plan?

Here is how I use this indicator. For the sake of simplicity, lets assume that everyone in the market is bearish at a given time and because of this prevalent feeling everyone is entering shorts in stocks, indices and even buying puts. With all market participants bearish and now sitting on short positions, a very interesting thing takes place – there is nobody left to sell. With nobody left to sell, there is no selling pressure on the market, and they start to drift higher. This drifting eventually hits the first set of stop loss orders. Now all these market participants will be using some sort of stop loss. Some will use a very tight SL, others may use medium and remaining using wide stop loss.
The group of tight stops get hit first, which generates a buying pressure taking market higher. Then the medium and finally the wide SL until all the stops are taken out.