Best Indicators for Options Trading in India | Technical Indicators for Option Trading
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Option traders utilize various types of trading indicators for options trading . In this article, we are going to discuss some of the best technical indicator for options trading in India using Talkdelta Prime
About Trading Indicators for Options ?
Before we move further to the best indicator for options trading let's first take a quick look at what is options trading? In options trading, the buyer of options has the right to buy or sell (depending upon the type of option the buyer holds i.e. call or put) specific security on a specific date at a specific price. There are mainly two types of options available in options trading: the one is CALL option and another is PUT option. If you buy the CALL option then you get the right to buy an underlying security at a pre-decided price within a certain time period. On the contrary, if you buy a PUT option then you have a right to sell that option at a pre-decided price within a certain time period.
These options can be of two types: American-style options or European-style options. With American-style options, traders can buy or sell the underlying asset any time up to the expiration date. Whereas, in European-style options, the underlying asset can be bought and sold only on the expiration date.
Options trading is one of the riskiest trading methods. The ones who are just beginners in options trading may lose their entire hard-earned money if they do it without proper study and proper tools. The trading indicators for options are one the most important tool in options trading. These are nothing but the software programs developed based on predefined theories, formulas, and ratios.
Importance of Best Technical Indicator for Option Trading
Since options are the decaying assets, if not done strategically, options trading involves high risk. In options trading, the buyer risks his entire capital. Therefore, for options traders, analysis plays an important role in deciding the strategies and determining the market trend. Here comes the role of trading indicators for options.
The technical indicators are mostly used by short-term traders. In short-term trading, continuous information about market trends is needed. The best indicator for options trading gives information such as current top gains and losses, the rising and falling indices.
Trading indicators help traders predict the future movement of an underlying asset that they are holding.
How to Choose the Best Indicator for Options Trading in India
The selection of the best technical indicator for option trading depends on the trading style and the type of asset the trader is trading in. There are four types of trading indicators available in the market: Trend Following indicators, Oscillators, Volatility indicators, and Support/Resistance indicators. These best indicator for options trading helps traders understand the range in which the market is moving, in which direction it is going, and the duration of that move. Let’s see the types of each of these indicators,
Trend Following indicators
Moving Average Indicator
Bollinger Bands® Indicator
In the next section of this article, we are going to see some of the best indicators for option trading in India.
Some of the Best Indicators for Option Trading in India
RSI ( relative strength index)
This is a momentum indicator and it compares the magnitude of recent gains to recent losses over a specified period of time to measure a security's speed and change of price movements. This indicator attempts to determine overbought and oversold conditions which makes it the best indicators for option trading in India. The values of the relative strength index indicator range from 0 to 100. The RSI value above 70 is the indication of overbought levels, whereas a value less than 30 is the indication of oversold levels.
The RSI is generally preferred and is best for options on individual stocks than for indexes. This is because the stocks show overbought and oversold conditions more frequently than indexes.
It is the volatility indicator. In options trading, volatility plays a crucial role and Bollinger bands are a popular way to measure volatility. Let’s see why it is one of the best indicators for option trading in India. As the volatility increases the Bollinger band expands and they contract as volatility decreases.
If the price of the stock price moves closer to the upper band then it is an indication that the security is overbought. Similarly, if the price moves closer to the lower band then it indicates the overselling of the security.
The movement of price outside of the bands signal the security is ripe for a reversal, and options traders must take position accordingly.
Intraday Momentum Index (IMI)
This indicator best suits the high-frequency option traders who bet on intraday moves. This indicator is considered to be the best technical indicator for options trading in India because it combines the concepts of intraday candlesticks and RSI. This combination provides a suitable range for intraday trading by indicating overbought and oversold levels.
An option trader can spot potential opportunities to start a bullish trade when the market is up-trending at intraday corrections. Also, one can initiate a bearish trade when the market is down trending at an intraday price bump. Momentum indicators frequently show overbought or oversold readings when there is a clear uptrend or downtrend. Therefore, it is important to be aware of the strong price trends in India.
Open Interest (OI)
This indicator, as the name suggests, indicates the open or unsettled contracts in options. Instead of indicating the specific uptrend or downtrend, the open interest indicator provides indications about the strength of a particular trend. This is the best indicator for options trading because the increasing value of this indicator indicates a new capital inflow that indicates the sustainability of the existing trend. Similarly, the declining open interest indicates a weakening trend.
As we have seen there are various technical indicators for option trading available in the market. But the use of any specific indicator is based on the trading style of an individual and the type of asset they are trading.