Understanding Volume & Open Interest

#1
Understanding Volume & Open Interest

Technicians utilize a three dimensional approach to market analysis which includes a study of price, volume and open interest. Of these three, price is the most important. However, volume and open interest provide important secondary confirmation of the price action on a chart and often provide a lead indication of an impending change of trend. For beginning students of the market these two concepts tend to be somewhat confusing but are very important concepts to understand in- undertaking a thorough analysis of market action.

Volume represents the total amount of trading activity or contracts that have changed hands in a given commodity market for a single trading day. The greater the amount of trading during a market session the higher will be the trading volume. As mentioned earlier, a higher volume bar on the chart means that the trading activity was heavier for that day. Another way to look at this, is that the volume represents a measure of intensity or pressure behind a price trend. The greater the volume the more we can expect the existing trend to continue rather than reverse. Technicians believe that volume precedes price, meaning that the loss of upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend on the bar chart.

Open Interest is the total number of outstanding contracts that are held by market participants at the end of each day. Where volume measures the pressure or intensity behind a price trend, open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.
 
#2
Relationship between the prevailing price trend, volume, and open interest

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.
 

sh50

Active Member
#4
I must have missed this very good post. How exactly do you interpret open interest. One has to monitor increase or decrease. How does one do that in metastock? I am attaching a file containing the daily info- but one has to analyse relatively. How does one do that?

IF you have written options, monitoring open interest would be of some help wouldn't it?

Also, on any breakout does the volume have to be double the average. In all books it is given that breakouts should be accompanied by an increase in volume. How much approx or there cannot be a thumb rule.
 

sh50

Active Member
#5
In Alexander Elder's book it is given that if daily volume exceeds the five day average by 50%, it is abnormal. Are there any such criteria for monthly volumes. On several websites, volume along with 30day average is given but by how much is it considered abnormal.?
 
#7
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.
Super post.......somehow missed this one!! Would have just put a link in response To Avinash's post on Open Interest :) .Very nice!!!!Thanks Prakash for bringing up this post again so that we can all have the pleasure to read it.
Saint
 

Traderji

Super Moderator
#9
rpc said:
Hi
I want to know what does rollover mean in derivatives market.Can anyone pls help .
thanx
rpc
Rollover means closing out the position in the current-month futures contract and taking a fresh position on the next-month futures contracts.
 

Similar threads

Intraday Higher Leverage

Save up to 90% in brokerage and get higher leverage for intraday trades.

Name:Phone:
Email:City:
State:
Are you a day trader?