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
Ichimoku Indicator
ADX Indicator
Oscillators
RSI Indicator
Stochastics Indicator
CCI Indicator
MACD Indicator
Volatility indicators
Support/Resistance indicators
Pivot Points
Donchian Channels
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.
Bollinger Bands
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.
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FAQs
The Intraday Momentum Index is a good technical indicator for high-frequency option traders looking to bet on intraday moves. It combines the concepts of intraday candlesticks and RSI, thereby providing a suitable range (similar to RSI) for intraday trading by indicating overbought and oversold levels.
Which indicator is best for option trading in trading view? ›
Dynamic Candle Balance Indicator The Dynamic Candle Balance Indicator is a powerful tool designed to identify imbalances in candle colors on a chart, which can indicate potential reversals or changes in market direction.
Which index is best for option trading in India? ›
The most actively traded index options in India are based on the Nifty 50 and Sensex indexes. Options are also available on other indexes like Nifty Bank, Fin Nifty, Nifty IT, Nifty Metal etc. You can do index option trading based on the following options available in the Indian stock market.
Which technical indicator is the most accurate? ›
Which is one of the most accurate trading indicators? The most accurate for trading is the Relative Strength Index. It is considered one of the best momentum indicators for intraday trading. It helps investors identify the shares which are bought and sold in the market.
Which is the most predictive technical indicator? ›
5 Predictive Technical Indicators to Consider
- The Simple Moving Average. A simple moving average (SMA) is exactly what it sounds like. ...
- Bollinger Bands. Bollinger bands add an additional layer of analysis to the simple moving average. ...
- 52-Week High/Low. ...
- P/E Ratio. ...
- Parabolic Stop-And-Reverse.
Here are a few best trading platform in india: Zerodha: Zerodha is one of the most popular and widely used discount brokerage platforms in India. They offer a comprehensive trading platform called "Kite," which provides access to various derivative instruments, including options.
How to use India VIX for option trading? ›
VIX Calculation involves both the current month and next month Out of the Money (OTM) options. In the Money (ITM) and At the Money (ATM) options are excluded from VIX calculation. These bid and ask prices of OTM options are considered for calls and puts. The output you get is the VIX.
What are the top three technical indicators? ›
The best technical indicators for forex traders are the RSI, MACD, and Bollinger Bands. Most FX traders use these as their primary indicators. There are other indicators available in the market, but these three tend to be the most commonly used for predicting future price points.
Which indicator confirms trend? ›
The average directional index (ADX) is used to determine when the price is trending strongly. In many cases, it is the ultimate trend indicator. After all, the trend may be your friend, but it sure helps to know who your friends are.
The stochastic indicator establishes a range with values indexed between 0 and 100. A reading of 80+ points to a security being overbought, and is a sell signal. Readings 20 or lower are considered oversold and indicate a buy.
What is the most accurate buy and sell indicator? ›
Stochastics are a favored technical indicator because they are easy to understand and have a relatively high degree of accuracy. It falls into the class of technical indicators known as oscillators. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum.
Which indicator is more reliable? ›
Moving Averages:
Traders often hear about daily moving averages (DMA), which is the most common and widely used indicator. The moving average is a line on the stock chart that connects the average closing rates over a specific period. The longer the period, the more reliable the moving average.
What is the best indicator for expert options? ›
The RSI (Relative Strength Index) indicator is one of the most important and famous indicators used by traders around the world. An ExpertOption beginner might not understand how to use ExpertOption and earn money.
Which chart is best for option trading? ›
Candlestick Charts: Candlestick charts are among the most popular options charts. They showcase price movement through colored bars (candles), indicating whether prices increased or decreased during a given time frame.
