how to analyse derivatives data for identification of stock trends

Podcast Duration: 05:08

Hi friends, and greetings from Angel One.
Today we are talking about something very exciting - we will understand how derivatives data is used for identifying stock trends in the market. So are you ready? Then let’s dive in!

Friends, are you familiar with technical analysis? When you do a preliminary analysis of the stock market, you can get a solid idea of where the market is headed. But how strong are these trends? When will they reverse? For that, you need to know what technical analysis is.

If you invest money in the stock market, you would want to have as much certainty on your forecasts as you can. Isn’t that right?

So friends, that’s why today we will talk about how you can predict stock trends through technical analysis of derivative data.

But before proceeding, let’s clarify one thing. Friends, technical analysis and fundamental analysis are not the same thing. So what’s the difference between the two? Let’s see.

If you want to understand as to when to invest and where, then you will make use of fundamental analysis. In fundamental analysis, we use macroeconomic trends and crucial stock indicators like PE ratio, debt/equity ratios, cash flow, and so on. Investors also look at press releases to account for other information in fundamental analysis.

On the other hand, if you want to understand as to when exactly a trade should be placed, and what’s the best time to exit, when a trend might reverse, then you will use technical analysis. Got it, friends?

In technical analysis we use quasi-statistical techniques and formal statistics to make our predictions and calculations.

So much for the jargon. Let’s see what these words mean. Basically, quasi statistics is essentially a sub discipline of statistics. By applying it, you can increase the precision of numerical data. Precision is the keyword here. So friends, let’s see how we can do technical analysis.

There are two broad ways of doing technical derivative analysis.
First way is through the use of indicators. The first step here is to design indicators which can reflect the changes in strength and presence of a time series. Feel confused? Let’s clear it out.
Friends, indicators are nothing more than a mathematical function of a time series. The parameters which constitute an indicator are usually decided by the investors themselves.
Got it? Then let’s proceed.

Let’s look at the second way of doing technical analysis.
So friends, while this method is somewhat primitive, it is still used by many investors. This method involves drawing support and resistance lines on charts.

The violation of these lines is read as a significant technical event. In a somewhat more complex application, investors interpolate patterns from the market behaviour.

After that, on the basis of historical occurrences of these patterns, investors forecast price evolution of a stock. However it is advised to not use this method in technical analysis. This is because interpolation of price evolution on the basis of historical occurrences assumes a fixed psychological attitude towards money.

In such a scenario, traders can also justify their position instead of objectively reaching a result.
That’s why, it is better to stick to indicators. Now, the crucial thing about indicators, is that they are suited for a certain type of market. While some indicators are oriented towards trending markets, others are oriented towards consolidating markets.
So friends, this is how indicators-based technical analysis works. These days, you can automate technical analysis. Investors can now build expert rules into their indicators to reach an objective evaluation of a situation or a stock. There are many existing indicators which can be automated to produce trading signals. These signals are triggered when specific events get triggered,

So friends, if a certain set of indicators is producing the same signal, you can place your trade with greater certainty.

For example, suppose that you inferred through fundamental analysis, that a certain company is overvalued. If your indicators confirm your position, then you will be more comfortable in buying those stocks. Isn’t that right? Let’s look at another example. Suppose that a certain set of indicators reflecting the speed of a trend suggest and upside explosive move. In such a scenario, you can make use of a leveraged payout structure to make an explosive upside move.

Friends, there is an important point to note here. Without fundamental and technical analysis, using derivative structures can prove dangerous. While there is tremendous scope for gains through derivatives, investors must do rigorous analysis and market research in order to stay on the positive side of these gains.

So friends, this was a snapshot of technical analysis through derivative data. If you want to maximise your returns and the precision of your trades, then an in depth study of technical and fundamental analysis can prove very beneficial to you.

So friends, that’s all we have for today’s podcast. If you like what we talked about, don’t forget to share this podcast.

Goodbye friends - Angel One wishes you a good day ahead.