Understanding Volume & Open Interest

#11
Hello Cmlee!

Open Interest is used only in futures and options
It is the total number of options or contracts which are not closed or delivered on the same day.In the chart Open interest is marked by a solid line below the price but above the Volume.

Cmlee this is what i know ,I dont trade in this arena so kindly excuse me .

Regards

Roneeth
 
#14
Re: Relationship between the prevailing price trend, volume, and open interest

TATrader said:
Relationship between the prevailing price trend, volume, and open interest

Each trade completed on the floor of a futures exchange has an impact upon the level of open interest for that day.

For example, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open interest will increase by one contract.

If both traders are closing an existing or old position ( one old buyer and one old seller) open interest will decline by one contract.

The third and final possibility is one old trader passing off his position to a new trader ( one old buyer sells to one new buyer). In this case the open interest will not change.

By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the days activity can be drawn. Increasing open interest means that new money is flowing into the marketplace.

The result will be that the present trend ( up, down or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves. A levelling off of steadily increasing open interest following a sustained price advance is often an early warning of the end to an uptrending or bull market.

The relationship between the prevailing price trend, volume, and open interest can be summarized by the following:

Price Volume Open Interest Interpretation
Rising Rising Rising Market is Strong
Rising Falling Falling Market is Weakening
Falling Rising Rising Market is Weak
Falling Falling Falling Market is Strengthening

It is important to understand that the futures price chart only records the data. In itself, it has little value. By monitoring the price trend, volume and open interest the technician is better able to gauge the buying or selling pressure behind market moves. This information can be used to confirm a price move or warn that a price move is not to be trusted. This will provide you with valuable information to develop a suitable pricing strategy and an appropriate production-marketing plan for your farming operation.
Hi TATrader,

Very nicely explaination on Open Interests. Great post. Just bringing this post in front of all the new member to get a chance to go through this information

Regards
Raj
 
C

Czar

Guest
#15
Alexander Elder - Trading For A Living

Open interest is the number of contracts held by buyers or owed by short sellers in a given market on a given day. It shows the number of existing contracts. Open interest equals either a total long or a total short position.

Stock market shares are traded for as long as a company stays in business as a separate unit. Futures and options traders, on the other hand, deal in contracts for a future delivery that expire at a set time.

A futures or options buyer who wants to accept delivery and a seller who wants to deliver have to wait until the first notice day. This waiting period ensures that the numbers of contracts that are long and short are always equal.

In any case, very few futures and options traders plan to deliver or to accept delivery. Most traders close out their positions before the first notice day.

Open interest rises or falls depending on whether new traders enter the market or old traders exit it. Open interest rises only when a new buyer and a new seller enter the market. Their trade creates a new contract. For example, if open interest in April COMEX gold is 8500 contracts, then 8500 contracts are held by bulls and 8500 contracts are owed by short sellers at the close of that day. If open interest rises to 8600, it means that the net of 100 new con*tracts have been bought and sold short.

Open interest falls when a trader who is long trades with someone who is short. When both of them close out their positions, open interest falls by one contract because one contract disappears. If a new bull buys from an old bull who is getting out of his long position, open interest remains unchanged: Open interest also does not change when a new bear sells to an old bear who needs to buy because he is closing out his short position.

Buyer ------ Seller ----- Open Interest

New buyer New seller Increases

New buyer Former buyer sells Unchanged

Former seller buys to cover New seller Unchanged

Former seller buys to cover Former buyer sells Decreases

Most futures and options exchanges release open interest data one day later than prices. Some exchanges provide phone numbers to call for prelimi*nary figures on open interest.

Technicians usually plot open interest as a line below price bars (Figure 34-1). Some chart services also plot average open interest for the past several years. Open interest gives important messages when it deviates from its seasonal norm. Open interest varies from season to season in many markets because of massive hedging by commercial interests at different stages in production cycles.

Open interest in currency futures tends to drop four times a year, at the time of a contract rollover. If open interest does not drop during a rollover, it shows a strong commitment among traders to the existing trend, which is likely to accelerate.

Crowd Psychology

It takes one bull and one bear to create a futures or options contract. A bull buys a contract if he is convinced that prices are going higher. A bear sells short a contract if he is convinced that prices are going lower. When the two trade, open interest rises by one contract. A single trade between one bull and one bear is unlikely to move the markets. But when thousands of traders make their trades, they propel or reverse market trends.

Open interest reflects the intensity of conflict between bulls and bears. It reflects the willingness of longs to maintain long positions and the willingness of shorts to maintain short positions. When bulls and bears do not expect the market to move in their favor, they close out their positions and open interest shrinks.

There are two people on opposite sides of every trade. One of them gets hurt when prices change. If prices rally, bears get hurt. If prices fall, bulls get hurt. As long as the losers hope, they hang on, and open interest does not change.

A rise in open interest shows that a crowd of confident bulls is facing down a crowd of equally confident bears. It points to a growing disagreement between the two camps. One group is sure to lose, but as long as potential losers keep pouring in, the trend will continue. These ideas have been clearly put forth in L. Dee Belveal's classic book, Charting Commodity Market Price Behavior.

Bulls and bears keep adding to their positions as long as they strongly disagree about the future course of prices. It takes conviction and disagreement to maintain a trend. Rising open interest shows that the supply of losers is growing and the current trend is likely to persist. If open interest increases during an uptrend, it shows that longs are buying while bears are shorting

because they believe that the market is too high. They are likely to run for cover when the uptrend puts a squeeze on them and their buying will pro*pel prices higher.

If open interest rises during a downtrend, it shows that shorts are aggressively selling while bottom-pickers are buying. Those bargain hunters are likely to bail out when falling prices hurt them, and their selling will push prices even lower. An increase in open interest gives a green light to the existing trend.

When a bull is convinced that prices are going higher and decides to buy, but a bear is afraid to sell short, that bull can buy only from another bull who bought earlier and now wants to get out. Their trade creates no new contract, and open interest stays unchanged. When open interest stays flat during a rally, it shows that the supply of losers has stopped growing.

When a bear is convinced that prices are going lower, he wants to sell short. If a bull is afraid to buy from him, that bear can only sell to another bear who shorted earlier and now wants to cover and leave. Their trade cre*ates no new contract, and open interest does not change. When open interest stays flat during a decline, it shows that the supply of bottom-pickers is not growing. Whenever open interest flattens out, it flashes a yellow lighta warning that the trend is aging and the best gains are probably behind.

Falling open interest shows that losers are bailing out while winners are taking profits. When their disagreement decreases, the trend is ripe for a reversal. Open interest falls when losers abandon hope and get out of the market without being replaced by new losers. When a bull decides to get out of his long position and a bear decides to cover his short position, the two may trade with one another. When they do, a contract disappears, and open interest shrinks by one contract. Falling open interest shows that winners are cashing in and losers are giving up hope. It flashes a red lightit signals the end of a trend.

Trading Rules

A 10 percent change in open interest deserves serious attention, while a 25 percent change often gives major trading messages. The meaning of rising, falling, or flat open interest depends on whether prices are rallying, falling, or flat at the time of change in open interest.

1. When open interest rises during a rally, it confirms the uptrend and gives a signal that it is safe to add to long positions. It shows that more

Tracking Commitments of Traders reports can help you find out whether new buying or selling is primarily done by small or large speculators or by hedgers (see Chapter 7).

Very few technical indicators use open interest. The Herrick Payoff Index is the best-known indicator that utilizes it.

short sellers are coming into the market. When they bail out, their short covering is likely to push the rally higher.

When open interest rises while prices fall, it shows that bottom-pick*
ers are active in the market. It is safe to sell short because these bar*
gain hunters are likely to push prices lower when they throw in the
towel.

When open interest rises while prices are in a trading range, it is a
bearish sign. Commercial hedgers are more likely to sell short than
speculators. A sharp increase in open interest while prices are flat
shows that savvy hedgers are probably shorting the market.

When open interest falls sharply while prices are in a trading range, it
identifies short covering by major commercial interests and gives a
buy signal. When commercials start covering shorts, they show that
they expect the market to rise.

When open interest falls during a rally, it shows that both winners and
losers are getting "cold feet." Longs are taking their profits, and shorts
are covering. Markets discount the future, and a trend that is accepted
by the majority is ready to reverse. If open interest falls during a rally,
sell and get ready to sell short.

When open interest falls during a decline, it shows that shorts are cov*
ering and buyers are taking their losses and bailing out. If open interest
falls during a slide, cover shorts and get ready to buy.

When open interest goes flat during a rally, it warns that the uptrend is
getting old and the best gains have already been made. This gives you
a signal to tighten stops on long positions and avoid new buying.
When open interest goes flat during a decline, it warns you that the
downtrend is mature and it is best to tighten stops on short positions.
Flat open interest in a trading range does not contribute any new infor*
mation.

More on Open Interest
 
C

Czar

Guest
#17
yup T1+2 :) but thought this post needs to be bought up... since on some other thread there was talk of OI...
 
#19
Hi, saw many seniors updating abt open interest in the forum and i have gone thru thoroughly ..but am a intraday player for NIFTY and MCX commodity CRUDE..in which am doing analysis ...in a pattern like this >>> making a note of PRICE and OI value 4 every 2mins. in a excel sheet applying the above mentioned formula say like if OI & Price both are increasing cont.. am going long and whn ever i see a sudden stop or fall of IO am exiting and depending on the next OI and price figures am entering the TRADE ...however this am doing on a trail basis but can any one throw some light in it and elaborate it as in HOW TO TRADE INTRADAY using Price,OI or Volumes...??? Anyoneee...

With best respects...:)
 

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