Open Interest & Price Action Co-relation

What is Open Interest? 

•Open interest is the total number of open contracts on a security, applies primarily to the futures market.

• Open interest is a concept all futures traders should understand, because it is often used to confirm trends and trend reversals for futures and options contracts.

• Although this number often gets lost as traders focus on bid price, ask price,

volume and implied volatility, paying attention to open interest can help options traders make better trades.

• Here we take a look at what information open interest holds for a trader and how traders can use that information to their advantage.

   What Open Interest Tells Us? 

• A contract has both a buyer and a seller, so the two market players combine to make one contract.

• The open interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.

• An increase in open interest along with an increase in price is said to confirm an upward trend.

• Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal.

  Price Movement and Open Interest Relation 

• If prices are rising and the volume and open interest are both up, the market is decidedly strong.

• If the prices are rising and the volume and open interest are both down, the market is weakening.

• If, however, prices are declining and the volume and open interest are up, the market is weak.

• when prices are declining and the volume and open interest are down, the market is gaining strength.

Source: An email from greed4fear@gmail.com.