Open Interest
Open interest refers to the number of outstanding contracts held by market participants at the end of the day. These are open contracts, yet to be offset by delivery or liquidation. This is distinct from volume, which measures the intensity of a price trend;
open interest, rather, measures the flow of money into the futures market. The greater the number of long positions, the greater the open interest. In an entering market, longs buy, shorts sell; in an exiting or liquidating market, by contrast, longs sell and shorts buy, and open interest decreases. This signals traders' exit from the market.

When open interest increases, then new money is flowing into the futures market, perhaps flowing out of the stock market or real estate market. This adds strength to existing trends; after all, if the market isn't doing something right, why would investors with other opportunities be pumping more money into it? Conversely, declining open interest suggests that the market is liquidating and implies that the prevailing price trend is coming to an end.

Volume and open interest tend to move in the same direction, rising and falling together. Price, however, moves independently. The impact on the market for a security is as follows:

  • When prices are rising but volume and open interest are declining, the market is expected to decline.
  • When prices are falling but volume and open interest are rising, the market is at its weakest.
  • When all three elements are rising, the market is strong.
  • When all three elements are declining, the market is expected to strengthen as it approaches bottom.


Summary And Review

Related Articles
  1. Trading

    Intro To Open Interest In The Futures Market

    Applied primarily to the futures market, this indicator confirms trends and reversals.
  2. Investing

    Using Open Interest To Find Bull/Bear Signals

    Volume should inform your use of this indicator in confirming trends and reversals.
  3. Trading

    Options Trading Volume And Open Interest

    Learn how these two statistics can give you an edge in trading options.
  4. Trading

    How To Read The Market's Psychological State

    Discover what on-balance volume, accumulation/distribution and open interest can tell you about the market mood.
  5. Trading

    Interpreting Volume For The Futures Market

    Learn how to read the volume reports, look at the relation to liquidity and interpret volume using open interest.
  6. Trading

    Forex: Gauging Forex Market Sentiment With Open Interest

    Examining open interest on currency futures can help you confirm the strength of a trend in forex market sentiment.
  7. Investing

    What The Market Open Tells You

    The first few moments of trading provide a lot of information. If a trader analyzes this information, it can give a lot of insight into the market's moves for the day.
  8. Trading

    How To Use Volume To Improve Your Trading

    The basic guidelines to analyzing volume may not apply in all situations, but overall, they can help direct entry and exit decisions.
  9. Investing

    Forecast The FX Market With The COT Report

    Three empirical findings on futures data can help currency traders determine buy and sell points.
  10. Trading

    Essential Strategies For Trading Volume

    Looking to trade using volume? Have a look at these essential tips.
Frequently Asked Questions
  1. How does the number of credit card accounts I have affect my credit score?

    Your credit score, which is also referred to as your FICO score, is a measure that creditors use to assess your potential ...
  2. What is the 'three-legged stool'?

    The "three-legged stool" was a retirement terminology from the past that many financial planners used to describe the three ...
  3. If I am looking to get an investment banking job, what education do employers prefer? MBA or CFA?

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ...
  4. Is a Simplified Employee Pension (SEP) IRA tax deductible?

    Learn everything you need to know about your SEP IRA, including the benefits to employers and whether or not a SEP IRA is ...
Trading Center