This Number Will Give You an Edge Over Other Traders in the Market

Sep 30, 2020

Vijay Bhambwani, Editor, Fast Profits Daily

I've received a lot of feedback from my video where I recommended doing nothing and the one in which I recommended caution.

Hey, I love your comments and queries. Keep them coming in.

In this video, I'll answer the most frequently asked question: What is the MWPL?

More importantly, I'll show you how you can use this vital number to gain an edge over other traders in the market.

Enjoy the video and let me know your thoughts.

Hi, this is Vijay Bhambwani here. I hope you're enjoying your trades, your investments in the market and the market is treating you kindly.

In this video, I want to answer a few queries and share my secret sauce about why I have been advocating caution from 1st of September, reinforcing that on 9th of September and of course, the last one was when I warned you about a whole lot of IPOs coming in.

The IPOs was more from financial point of view because the markets would suck out liquidity from the secondary markets, and therefore it was a no brainer but the 1st September video and 9th September video were all about behavioural technical analysis coupled with statistics.

So a lot of my viewers have asked me questions and hey, I love your questions. I don't mind sharing my knowledge with you at all. So please keep them coming, and I will attempt at best, the best of my capabilities to answer your queries here.

So in the one query that has been coming in significantly often is about the MWPL. Now, in case you haven't really joined Equitymaster's Telegram channel yet, I would strongly urge you to do so. It's has a handle Equitymaster Official wherein I put up three updates every day, Monday to Friday, about some statistical inputs that my home grown statistical trading model throws up.

In that one of the things that I cover is the MWPL. Now a lot of viewers, especially people who joined the Equitymaster Telegram channel, asked me what is MWPL? What is its significance, and how does it help you and me to trade better? So here goes, and you may basically try this system out over the next couple of trading sessions when I update the MWPL figures every evening.

MWPL stands for market wide position limits. Now, a lot of times you would have come across updates on your trading terminal by way of flashes when your broker tells you so and so stop is under a ban period because the MWPL limits have across 95%. Now what does it really mean?

You see, every stock has a limit set by SEBI, beyond which traders, speculators, players call them what you want, cannot create more positions. Now, let's assume that a stock X has a limit of 10 lakh contracts. Now, what really happens is the MWPL absolute is 10 lakh contracts.

Now traders will obviously build positions depending on their expectation from the stock. So the higher the MWPL, the more expectation there is from the market in that particular stock. Obviously, MWPL is highest in the most volatile stocks because people expect the prices to thrash about, move about a lot, and they are relatively lower or subdued, even in single digits, in stocks that don't really budge or move too much.

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Now, the reason why I have an advocating absolute amount of caution from 1st of September onwards was, I took a list of MWPL of all the futures available in the market and then I've taken an average of the overall market.

I found that the MWPL and I have historical database of the MWPL that has been prevalent at various price points spanning back a couple of years, I found that the MWPL was within kissing distance or sometimes even surpassing the historical price band.

Now band is the lowest and highest. Obviously after expiry, MWPL tends to fall because a lot of positions gets squared up and as we proceed into the new derivative cycle, you'll see that the MWPL starts going higher and higher from the lower end and going into the upper end.

But many a times the MWPL was actually going above the historical upper band. Now what does it indicate? It basically indicates that the traders had a huge amount of expectations from the markets.

What happens when the markets have excessive expectations? You tend to over trade. From a behavioural finance point of view, it basically means that you over trade.

Now in you over trade you tend to be jumpy. You then to be nervous. So whenever there is a little bit of volatility in prices, a lot of traders tend to exit or they get thrown out by brokers for warrant of mark to market margin. That causes extreme volatility and trashing about in prices.

In very simple layman's terms, let me ask you a question. Have you seen off late, especially from 1st of September onwards, where you're making money in trading and on the long side money might have come relatively easier as compared to the shorts because the market was still rising, you were making 30, 40, 55 paise per share in the futures of maybe a rupee, two rupees per share in the futures but whenever the market tanked you were losing 3, 4, 5 times more than what you were making so far? Has this happened to you?

If this has happened to you, you can thank the extremely high MWPL readings. Now, wherever there is excessive amount of expectation, whenever these expectations are belied or they are let down, there is a great deal of pessimism, at least in the short term.

So what you're basically seeing is that emotional flapping about or the fluttering of a whole lot of short term traders who are getting frustrated in the market and this frustration is showing up in the numbers.

You know, the best thing about our markets of today is that they are electronic and they leave digital footprints in the sand of time. Each and every transaction changes some number somewhere on your trading terminal, and as long as you train yourself in the language of mathematics and numbers, you can see what the market is actually trying to convey to you.

I feel that these numbers are actually trying to talk to you. As long as you hear the language of these numbers well, you have basically a significant edge over the other traders who are not listening to these numbers.

So from 1st of September, what I noticed was and this I said in the other videos, that there is a deceleration, which means a slowdown in the acceleration of the up move. So I saw momentum was slowing, and secondly, I saw MWPL was rising. So in spite of the fact that prices were not rising fast enough, traders were building up more and more long positions, expecting the prices to continue to move as fast as they have done in the past.

But you know, when you keep on loading a tired horse with more and more burden, no matter how you whip it, it cannot run faster because it is tired. This is what I anticipated and this is what actually happened last week when the markets fell. Both the indices almost fell 4% on a day on day basis in spite of the smart rally on Friday.

Now can you do or can you use the MWPL by yourself to learn this as a standalone trading system? I think no metric can be a single standalone be all and end all metric.

But I would swear by the MWPL along with a few other statistical tools, which I think give me an additional advantage in which my subscribers to the Weekly Cash Alert service will agree with me that gives us an additional advantage over traders who don't use so.

Is the system very easy? Remain assured, Vijay Bhambwani will not tell you anything that you cannot master as long as you are an eighth standard pass school graduate. If you cleared your 10th standard, you will get this in a jiffy.

The beauty of trading systems is that the most profitable trading systems are the simplest ones. They are easy to grasp and more from me on trading systems, especially statistical ones, which you can master to garner an edge over your fellow traders.

On this promising note, I'll bid goodbye to you, but not before requesting you if you're watching this video on YouTube, do click like on this video and subscribe to my YouTube channel. In the comments section, do let me know what you think of this video in what you would want me to record next.

Help me reach out to knowledge-based investors and traders and traders who would want to imbibe a 360 degree world view of the financial markets by recommending my video to your family and friends.

Do take very good care of your health, your family, your friends, your trades, and investments. Vijay Bhambwani signing off for now. Have a very profitable day. Thank you for watching my video.

Stay safe and have a very profitable trading day!

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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