Here are some general guidelines on how the interaction of price and volume/open interest might affect value:
- 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.
- Price up, volume up, open interest up - bullish as it indicates traders still want to buy despite the higher price.
- Price down, volume up, open interest up - bearish as increasing volume is driving the market lower.
- Price up, volume down, open interest down - reduced buying interest and a possible market top.
- Price down, volume down, open interest down - decreased selling interest at lower prices, indicating a bottom may be in place.
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
|
