Trend Analysis using Open Interest and Volume

Open Interest (also known as Open Contracts or Open Commitments) refers to the number of active or open contracts for any given security. It applies to the futures and options markets but not to stocks.

In the futures market it refers to the total number of contracts long or short in a delivery month or market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.

The open-interest position that is reported each day for a given market shows the increase or decrease in the number of contracts for that day in the form of a positive or negative number.

It is one of the foremost tools for confirming trends and forecasting trend reversals in the futures market.

– Open interest rising along with prices is a bullish indicator that an uptrend is in progress and is likely to be sustained. It shows that new money is entering the market.

– Falling open interest and rising prices is a bearish indicator, suggesting that the rise is being caused by short sellers covering their positions. The upmove is unlikely to be sustained because new buyers are not entering the market.

– Open interest in a sideways market can suggest a breakout in either direction.

– A rise in open interest in a falling market suggests that a downtrend is in place. New money is entering the market through short sellers.

– When both open interest and prices are falling, this suggests that the longs are closing out their positions, indicating a trend reversal and an upward movement in price.

– Static open interest along with rising or falling prices suggests a possible market top or bottom and trend reversal.

Volume is often used along with open interest. Volume refers to the number of contracts that have to have been traded within a given session. Volume precedes price. The higher the volume traded, the more likely a trend will continue. Rising open interest confirms that new money is supporting the prevailing trend.

Using volume and open interest together:

Price Open Interest Volume Forecast
Rising Up Up Bullish (trend confirmation)
Rising Down Down Bearish (possible trend reversal)
Falling Up Up Bearish (trend confirmation)
Falling Down Down Bullish (possible trend reversal)