What is a Long Build Up in the Share Market?

To be successful in trading, one must have strong analytical skills, as you need to understand the market trend and the movement of asset prices to create a long or short position. There are various indicators available through which you can identify the trend. One such indicator is “Long Build Up,” which helps in identifying the bullish trend in the stock or index.

In this blog, we will discuss the concept of long build up, its meaning, characteristics, and implications for traders.

What is a Long Build Up?

The term “long build up” describes a scenario in which traders and investors are expecting a bullish movement and build a long position in an asset. Traders use Open Interest (OI) data from the derivative contracts of the asset to identify the long build up. Now, let’s first go over the concept of open interest before learning how it helps in identifying a long build up. 

Open interest is the total number of open derivative contracts held by investors at the end of the trading session that have not been settled. An increase in open interest of the derivative contracts with a simultaneous increase in asset price in the cash market signals a greater likelihood of a bullish trend.

Key Characteristics of a Long Build Up

There are various characteristics of a Long Build Up, a few of which are mentioned below-

• Rise in Prices – Long build up features a bullish trend in the stock or index price levels. A price increase with the rise in OI and volume confirms a long build up.
• Rise in Open Interest – In case of a long build up, the open interest in the derivatives market increases with the market price of the asset. Traders create long positions in the derivative market to take advantage of the expected bullish movement.
• Volume – An increase in volumes, along with rising prices and OI, further confirms the presence of a long build up.
• Bullish Market Sentiments – A long build up suggests an overall bullish sentiment in the market, as the majority of the market participants expect the asset price to rise.
• Rising Long Positions – Market participants create long positions in both the cash and derivatives markets and buying pressure can be seen in the market.

How Does Long Build Up Occur?

The long build-up scenario develops in the following phases-

• Change in Market Sentiments – A long build up features a shift in the market sentiment from bearish to bullish.
• Price level – The prices of the underlying asset increase to justify the presence of a long build up.
• Open Interest – OI is the most important factor in the long buildup, as an increase in open interest indicates an increase in long positions in the derivatives market, suggesting a buying momentum.
• Volume – There should be an increase in trading volume along with the rising price levels and OI, as it helps confirm the traders get a confirmation signal of the presence of a long build up.
• Technical Indicators – Investors can combine other technical indicators to confirm the presence of a long build up.

Hence, traders should keep a close eye on changes in open interest, volume, and price movements for the underlying asset to analyze a long build-up.

Implications for Traders

The long buildup has numerous implications for the traders; some key implications are mentioned below-

• Profit: A trader can earn substantial profits by entering into a long position based on the long buildup. For example, if a trader finds a stock with increasing price, rising open interest and volume, then he can buy that stock and earn profit from the expected bullish movement.

• Risk: Creating a long position based on a long build up can result in losses, as any negative news in the market can cause sudden volatility and trigger stop-loss.
• Trading Opportunity: Long build up offers a trading opportunity in the derivatives market. For example, a trader can take advantage of the long build up by buying calls or futures, which will gain value as the underlying asset price increases.

Conclusion

On a concluding note, in a long build up, traders increasingly create long positions in expectation of higher prices. A long build up features a rise in the price of the asset and a simultaneous rise in OI of the asset’s derivatives contracts. Expertise in identifying and analyzing long build-up data is crucial for proficiently navigating the financial markets. Individuals can use trading platforms and other websites to analyze the OI data and take advantage of the trading opportunities offered by a long build up scenario. It is important to consult a financial advisor before trading.

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