Maxpain Deviation is a compression scanner.

But unlike other compression scanners, It not only searches for the stocks which are about to break out or break down, but it also makes a probabilistic bet on the direction!

Prerequisites:

Before We discuss Maxpain Deviation, it is important You have a proper understanding of Underlying theories –

Now, Checkout the metrics from the Open Interest Dashboard.

You will not find this interpretation of max pain theory and this analysis anywhere else. This is proprietary.

All of these tools, theories have been possible because of a strong community made by like you only. However, The next part gets more complicated. Let’s discuss the theory straight with a past example and a live example –

Image from our Slack Community

Here goes the Tradingview link of the trade as well.

The maxpain deviation when I posted was at 11.75%. CMP was at 340. Maxpain was at 380.

380 was 11.75% far from the CMP at that time. Despite a huge fall, there was no shift on Maxpain, Hence the deviation.

The core bet is – It will rise again towards the maxpain as the expiry day comes. I posted it on the 26th of May. 28th May was expiry. Do you know where it was closed at the time of the monthly expiry?

386.85

We can not predict the future! We can only make a probabilistic bet based on some set of data. The “set of data” the theory revolving it and the assumptions is already known to you. This trade was decided without charts.

But, if we see the chart, price-action-wise it was buy too!

The more nearer the expiry is, the more significant the Maxpain deviation will be!

Live Trading Plan:

BHEL has high lot size. Let’s skip that.

As Jay Z says, On to the next.

Bharat Forge has closed above the resistance.

As per theory of Support and Resistance, there can be two trades –

If it breaks tomorrow, the high of Friday, We will buy it. If it doesn’t break tomorrow and also comes below the initial resistance line, We will short with mild stop loss.

  • First case bets on breakout!
  • Second case bets on coming back to the channel i.e. Fake breakout!
  • CMP is 326.05
  • MPD is 9.26 (MaxPain Deviation)

Lets do OI analysis.

  • Maxpain is 300! So it tells to bet on the short side.
  • You can see the PCR is insanely weak, 0.46.
  • For every 0.46 put sold, there are 1 calls sold. = For every 1 put sold, there are 1/0.46 ~ 2.17 call sold.
  • Even on Friday itself, twice amount of call options is sold.
  • The drawback is 300 has the highest Put OI. Also, 300 has second-highest Call OI.

Something serious will happen in that point or maybe it will just keep consolidating in the 300 range. Anyways, our bet is it will go to 300. (without consideration of price action) (But theory is valid as of now, today!)

NOTE – Also, This is just start of the this month’s contract. The Theory of Max pain will be having exponential significant at the Date to Expiry nears as more contracts will get built up as the expiry nears. Right?

My personal view is it will breakout and again come back to the point where it had broken out and then, it will again shoot up.

I am adamant on the part of shooting up because Bharat Forge is a high beneficiary from the Government’s Coal Privatization Scheme.

Key Takeaways:

Lets call, Max Pain Deviation Theory = MPD Theory

  1. The MPD Theory is more significant as the expiry day nears. The more open interest, the more validation!
  2. The MPD Theory gives us an idea of the direction of breakout or breakdown.
  3. The MPD Theory is based on only open interest and time components. There is no use of price
  4. It doesn’t stay constant. It keeps changing!