PCR is also among the most significant parameters in technical analysis, which displays the quantity of trading of put options to the trading of call options. It is used to determine the main trend in the market and forecast some changes in this trend. PCR above one suggest that the tone of the market is bearish in nature while PCR below one suggest that the tone of the market is bullish naturally. It has been found that the pcr ratio can give valuable information to the traders and investors if they know how to read it.
It is identified through PCR
It indicates if there are more bulls buying calls or bears buying puts in the market. A high put-call ratio implies that there are many bears buying puts in the market while a low put-call ratio indicates that there are many bulls buying calls in the market. In particular, PCR more than 1 suggests that put options volume is greater than call options on the equity. This is evidenced by fears and bearishness that trade has exhibited in the market. On the other hand, if PCR is below 1 it implies greed and means more traders are long the markets and putting on bullish call options.
High levels of PCR are indicative of reversals
The PCR also identifies where there are signs of a market reversal or a turnaround in the trend. With the help of the PCR, it is possible to detect that bearish sentiment may be overbought going to the extreme in some cases. In the past, levels of such intensity have signalled the bottoming process and a turn to the upside. The tops or reversals to the downside are associated with very low PCR levels. These extremes are great signals especially if affirmed by other technical tools such as patterns or moving averages.
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Assess its risks and opportunities for cooperation
It is also important to compare PCR with the current market positioning strategy, which is currently common in the market. According to the contrarian aspect, PCR at higher levels indicates that the uptrend from the downtrend phase may be looming. But if the PCR is rising in an already uptrend zone then it might suggest that the bulls are overdoing it and that the uptrend may be in its final stages. Conversely, in a bearish market, a declining PCR suggests that the bears are tired, while in a bullish market, a declining PCR means that the bulls are regaining their strength. Knowing this contrarian character allows establishing a precise timeframe when the PCR indicates reversals.
Give high-probability signals
Another useful indicator is the trade signals that involve the price action and the PCR if there are any discrepancies. For instance, when the market’s high is higher than the previous one, but the PCR makes a lower high, it is suggestive of deteriorating bullish momentum that may not necessarily be healthy for the market. Only sometimes the growth of the market could be fast and soon the pace could decrease and there could be even a downfall. However, a lower market low with the PCR making a higher low indicates that the bearish pressure is getting better, and the prices may reverse higher. These differences underscore how counterintuitive reading the PCR gives likelihood and time-sensitive indication.
PCR with support / resistance level
When PCR signals are supplemented with support and resistance level indicators, the trading signals generated are quite strong. For instance, the PCR values can depict overbought/oversold levels showing some support or resistance levels. A PCR much greater than 1 suggests potential support below or at the PCR level while an extremely low PCR suggests overhead resistance. Support and resistance level trading entries can be timed near these levels once a reversal or divergence is given by the PCR indicator at overbought or oversold conditions. The analysis in terms of support and resistance helps in enhancing and confirming signals from PCR-based securities.
Conclusion
In this case, any variation in put-call ratio and any significant and unusual reading that is identified by the traders, can help them make the right entry and exit points. When PCR signals contradict other trends like support and resistance, then, the use of PCR offers traders a probabilistic strategy. Bulls and bears are different types of forces that dictate the technical analysis of the stock market and it is important to learn how to identify the sentiment and power between these two forces. Monitor the put-call ratio to identify either reversal or breakout patterns on the particular stock through other indicators like hammer candlestick that we can trace through the 5paisa platform.
