How to Trade Confidently in a Bull Market with Volume PCR

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Markets are making fresh highs every day, but it can be scary to trade in a market that has already run up a lot. How can you deal with this?

One way to get a better understanding of the short-term market outlook is to use Volume PCR (Put Call Ratio). Volume PCR is a measure of the relative volume of put and call options. A higher Volume PCR indicates that more put options are being traded than call options, which suggests that bearish sentiment is increasing.

There are three key characteristics of Volume PCR that can be used to trade confidently in a bull market:

  1. Dominance of either Call or Put volume typically only lasts for a short period of time. This is just like a short-term trend, which typically continues for at least a few days before reversing or pulling back.
  2. Volume PCR moves in a range, while stocks can go up and up. For example, Volume PCR for the Nifty has been moving in a range of 0.7-1.3 in the past three years.
  3. Volume PCR is negatively correlated with the underlying. This means that Volume PCR often rises during the fall in the underlying and often falls during the rise in the underlying.

By combining these three characteristics, we can use Volume PCR to gauge short-term insights about the small ups and downs within a long-term trend. For example, if we see Volume PCR at a recent bottom, we can create a cautious view for the underlying, because rising Volume PCR is always seen alongside falling underlying.

This means that Volume PCR can help us get the first sight of a turnaround in a bull market. With this indicator, we can trade more confidently with a solid exit strategy in place.

Here are some tips for using Volume PCR to trade in a bull market:

  • Look for Volume PCR to be at a recent bottom. This suggests that bearish sentiment is waning and that a rebound may be imminent.
  • Enter long positions when Volume PCR starts to rise. This suggests that bullish sentiment is increasing and that the market may be ready to resume its upward trend.
  • Place a stop-loss order below the recent bottom of Volume PCR. This will protect your profits if the market does not rebound as expected.

By following these tips, you can use Volume PCR to trade more confidently in a bull market and potentially increase your profits.


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