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.
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.