Deviation from OIWAP

Published on: May 16, 2024

Nifty 22500PE 30-May-2024 with OIWAP as a price overlay and Deviation from OIWAP in the bottom.

What is OIWAP?

The OIWAP (Open Interest Weighted Average Price), provides a weighted average price transaction price of contracts opened. In short, this is the market participant’s average price based on the open interests created by them.

What is Deviation from OIWAP?

Deviation from the Open Interest Weighted Average Price (OIWAP) refers to the difference between the current price of a security to its OIWAP. The deviation indicates significant shift in market sentiment and potential price reversal.

Deviation from OIWAP Parameters Explained

OIWAP Input Type, could be any of the following: Open, High, Low, Close, (H+L)/2, (H+L+C)/3, (O+H+L+C)/4.

Input for LIWAP and SIWAP can also be any of the input types.

Reference Type is the reference price that you’ll be comparing with the OIWAP.

Line 1 is the upper band (5% for Futures & 50% for Options).
Line 2 is zero for both.
Line 3 is the lower band (-5% for Futures & -50% for Options).

You also have an option to see your reference price deviation not only from OIWAP, but also from LIWAP & SIWAP.

Implications and Interpretations of Deviation from OIWAP

Trend Confirmation

Aligning trading strategies with the direction of the OIWAP, if prices are consistently above OIWAP, long positions are favored; if below OIWAP, short positions are favored.

Market Sentiment and Crowd Participation

Price moving up or down with OIWAP moving along with it indicates the participation of market participants in the trend and the crowd is confident about the trend. If price moves significantly away from OIWAP indicates lack of participation form the traders.

Potential Reversal and Mean Reversion

Large deviations away from OIWAP can signal market reversals, traders might anticipate a price moving back to its equilibrium level OIWAP. This approach works well in range-bound markets.

Conclusion

Deviation from the Open Interest Weighted Average Price (OIWAP) is a powerful indicator of market dynamics and market participants sentiment. If, OIWAP is the weighted average price of the market participants, and if price is 50% below it and if you make your buy entry there, haven’t you relatively positioned yourself better than the crowd? and if the price is 50% higher than the OIWAP and if you buy there, you’re paying 50% higher than everybody. So, understand where the market participants are sitting and try to position yourself relatively better than the crowd and deviation from OIWAP helps you do that.

Prasath V A B