Last time, we discussed how volume is an indicator of the movement in market trends. But this generalization is not foolproof, and we must consider other factors as well.
The reason we canβt consider volume as a sole indicator of the firmness of a movement is that it is susceptible to manipulation. Market players can manipulate and generate volume to t deceive the rest of the market. This is illegal, but that is no respite for the trader or investor as though the perpetrator shall be eventually punished, the losses incurred shall not be recovered.
What is the modus operandi of such manipulations? This question is quite expected, and we shall revert back to the basic example of Ravi and Rajesh to explain this. Suppose a village has 5,000 acres of land, and Ravi and Rajesh each own 2,000 acres. Suppose they want to increase the rates of their land, and they are successful in doing so, they can sell it off and earn huge profits. So what do they do to increase the profit? Suppose the market for land is the type of market we have on stock exchanges, where there are a lot of buyers and sellers who can transact with the help of a trading platform. So one of them, say Ravi sells his land for Rs. 5L per acre, which is more than the actual price, and Rajesh buys at this price. And then, Rajesh sells it back to Ravi at a higher price.
They repeat this series of transactions again and again, this leads to an increase in price. This price is inflated by the actions of the major players in the market, and is not sustainable as just as they exit the market, with lots of profits, the market will crash, and resume trade at earlier levels, or even lower. Now put this in perspective of the options markets. We can decipher that the volume, thus, must also be supported by open interest as well. This is a more than fair idea at this level.
We shall probably begin with option Greeks in the next discussion.
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Interesting to read π
good!
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Interesting π
Informative.
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Interesting