In this article, we will see how Put Call Ratio(PCR) determines the Market direction. PCR is one of the many leading market indicators that based on the number of open interest positions can give you an indication of the market direction. This indicator is frequently used by retail investors, institutional investors, day traders and by many other people in the market. Hence it is very important to understand this key indicator before taking any positions in the market. Here we will try to understand what is Put Call Ratio(PCR) and how it determines the market sentiments.
What is Put Call Ratio(PCR)?
PCR or Put Call Ratio is the measurement of the ratio of the total PUT open interest on a given day to the total CALL open interest on the same day.
How Put Call Ratio(PCR) determines the Market Direction?
There is an universal saying in stock market that retail investors loses money and institutional investors makes money. There are many reasons why retail investors always ends up in losing majority of their money but one of the key reason is the lack of understanding of the current open interest positions in the market.
There are few key indicators that can help retail investors understand the open interest positions. One such indicator is PCR which will give you the positions of the retail investors and the market sentiments attached to it. This information can help you in minimizing your losses and maximizing your profits subject to certain external stimulus.
Case 1: If PCR > 1
If PCR value is greater than 1 then it means retail investors have more positions in PUT than CALL which means market is expected to go down but actually it won't because institutional investors has taken CALL positions.
Case 2: If PCR < 1
Similarly, if PCR is less than 1 then it means that the retail investors have taken more positions in CALL than PUT which means they are expecting market to go up but actually it won't because institutional investors has taken the CALL positions.
So in summary if PCR < 1, then market will go down and if PCR > 1, then market will go up. With this information, retail investors can now make better decisions in finding the market direction which ultimately will help reducing the losses in the market.