Trendline Analysis and Open Interest

#13
....
5) A breakout from a trading range will be much stronger if open interest rises during the consolidation. This is because many traders will be caught on the wrong side of the market when the breakout finally takes place. When the price moves out of the trading range these traders are forced to abandon their positions. It is possible to take this rule one step further and say the greater the rise in open interest during the consolidation, the greater the potential for the subsequent move.
.....
Hello all,

Although this thread is a old one and not active, I've got one question. The author tells that greater the rise in OI during consolidation, greater the potential for the subsequent move.

How? Can anyone please explain it?

Thanks,
Praveen.
 
#14
There is one thing I dont understand. Maybe you understand this. It is open
interest. This is the number of futures contract that are still held by
market participants at the end of each trading day. Surely open interest
should stay the same every day. Futures trading is a zero sum game and
futures contracts can only exchange hands between participants rather than
be created out of thin air.
My understanding is that each futrues exchange eg LIFFE or CBOT have a given
no of futures contracts eg 1,000,000 contracts of sugar or oil or cocoa and
these contracts are swapped many times throughout the day by market
participants contributing to volume.
How can open interest increase - where are these new contracts coming from?
If I hold 10 contracts today and sell them tomorrow - I have to sell them to
someone else who is holding them so open interest stays the same. Its like
passing a torch - I can pass it to you, you can pass it to Mr. X etc. But
whichever day you look at it - someone will have the torch and there will
only be 1 torch. Here with open interest people are saying on Monday there
will be 1 torch, on Tuesday 3 torches etc.
This is only possible if someone is increasing the liquidity of the exchange
by creating more futures contracts available to public if they notice there
is increased market participants.
Do you understand what I mean?
 

sudoku1

Well-Known Member
#15
Trendline Analysis and Open Interest​

Although Moving Averages offer an excellent means for determining the trend in the market, their lag and lack of precision makes it difficult to trade them in an optimal fashion. Trendline Analysis allows us to more effectively trade the market by clearly defining levels of support and resistance. This is particularly true when combined with an analysis of trends in the Open Interest. These analysis techniques may be applied to any time frame and are useful in developing a long-term "top down" form of market analysis. We'll go into greater detail on "top down" techniques in another article.

Conventional wisdom holds that Trendline support is found at levels where buyers have consistently entered the market in greater numbers than sellers. Trendline resistance levels are those that have managed to consistently attract sellers over buyers. A Trendline is drawn by simply "connecting the dots". More specifically, connecting the lows below or highs above the market with a straight line and then extending that line into the future by continuing to the right hand margin of your chart. You will find a Trendline drawn off five high or low points much more resilient to penetration by the market than a Trendline drawn off just two points. Also, you will notice that a market trend tends to accelerate as it develops. For instance, you will be able to draw several Trendlines under a rising market with the slopes of each Trendline increasing as they move forward in time.

Old support often turns into new resistance. This is largely because traders who got long at previous support levels will own their position under water if the support level is broken. Therefore, every time they have a chance to break even when the market pulls back to its old support level they will attempt to sell their longs. Thus, the weak longs are putting a cap on the subsequent rallies.

Open Interest represents the total number of net open positions in the market. Open Interest is not the total number positions held overnight by all traders, just half of them. Increasing Open Interest is regarded as a sign of confidence in the trend as traders commit an increasing amount of capital to the market. Decreasing Open Interest is indicative of a lack of confidence in the current trend. Traders are liquidating their positions. Therefore, a rising market with decreasing Open Interest may actually be a bearish scenario. You can anticipate a decrease in Open Interest when a market retraces after a prolonged rally.

Your optimal bullish scenario for establishing a long position would be to see a series of increasingly steeper Trendlines, drawn on three of more points, combined with rising open interest. Therefore, your chart shows you a confidently rising market with increasing momentum and capital commitment by traders.
:thumb:....
 
#16
I NEED CLARIFICATIONS:
Options are hedging tools:
SmartMoney (Smart People) write Options to hedge their positions
They take unlimited risks hence their view point about the movement of the price should(may) be more valid.
So when Open Interest (OI) in PUT increases means SM is bullish and they assume price will not fall below the strike price
When OI for CALL increase means they see price will not go above the strike price.
So when we compare OI of PUT and CALL, if PUT-OI is more means there is more bullish view than bearish and vice-versa.

CALL-OI is more than PUT-OI
-> there is more addition to CALL than PUT means stock continues to FALL
-> there is more addition to PUT than CALL means stock may be cooling or reversing

and vice-versa

AM I RIGHT??
 

Similar threads