contra trading

With respect to index trading best gains are made when writing put when market falls just before it turns up and by writing calls when market has run up just before it turns down. Trying to do this we have two situations
1. Rangebound
Here market just keeps going up/down in a range. In such cases you must write CEs on green candles and wait for red candle to book profit and write PEs on red candle and book profit on green candle. Here if you wait for red candle to show up to write puts it will already be too late and premiums will be lost because both red/green candle series hardly last for 2-3 candles.

2. Trending
Here market is making large moves, is not confined to any range and is breaking multiple ranges on the downside. In this case you need to wait for entire series of red candles to play out and write put only after green candle shows up. If you try to write PEs while market is falling, you will get trapped in the next big red candle which will lead to premium spike.

PCP reversal model
How much to wait for the red candle series to be over? because in the series of large number of red candles there can be few false green candles that can be used to trap for reversal traders. For this follow the PCP model (Position banaya/Chu**** banaya/Profit banaya model). Basically wait for 3 waves of red/green candle series before taking a reversal trade on a large trending day.

Risk Reward
While PCP works most of the time, on some days market can give you a PCPP day (Position banaya/Chu**** banaya/Phir Chu**** banaya/Profit banaya model). This can lead to a loss on the PCP trade. Usually if PCP turns out to be a PCPP day the last leg of fall will be even more severe since more people will be trapped in the trade. Now either you take the reversal trade once PCP manifests on the charts or you worry about every PCP becoming a PCPP day and sit watching. So you will avoid a big loss day but you will also miss 10 good profit days. So best approach is to take a trade on PCP, monitor market closely after taking the trade. If it turns into a PCPP day book out with Stop Loss. If it is actually a PCP day, you will make good profits. Enjoy!

Conclusion
Main thing to understand here is that when the series of red, green candles are moving in small range you can take the risk of writing CEs on green candles and PEs on red candles. When the series of red, green candles cover large ranges, you need to wait for the series to be over and price candles to give a reversal signal before taking position. In the first case there is hardly any time to take position on reversal. In the second case you have enough time since reversal will also be large and long after a big fall or rise.