What are Volume and Open Interest?

Both the volume and the open interest will reflect the psychology of the market as well as that of the trader himself. Therefore, its compression will be vital to achieving consistent success.

The volume, by definition, is the total number of lots traded, in other words, what has moved the market. Refers to a specific period of time, daily values ​​are normally taken.

For its part, open interest represents the volume of orders that remain open overnight (for more than one session).

Now we can ask ourselves an interesting question, if the listing price changes, will the volume and/or open interest also change? The answer is definitely no. The price does not need to move to cause a change in volume or open interest, but a change in volume and/or open interest normally produces a change in prices or can give us a signal to anticipate a possible change in trend. No trader will always win, sooner or later some traders will close positions, either with profit or loss, generating a turn in the trend.

Information that we can obtain from the volume and open interest

– High Volume – Indicates a mass-market share.

– Low volume: low market share.

– High open interest: it can translate into an increase in operations that are left open overnight, which implies taking a higher risk. Traders who do this will generally be experienced and high capital traders.

– If the open interest decreases we can say that there are traders closing positions assuming a loss or a profit, we can say that most of these closings will be made by under-capitalized and experienced traders who will receive the counterpart from a more professional and experienced trader.

And how do we use this information to our benefit?

With the information described in the previous paragraph, we can deduce who is participating in the market and, most importantly, what they are doing, which will allow us to support our decisions. Let’s focus on 4 possibilities:

 

– In this way, if the price is rising and the volume and open interest decreasing, we will know that the traders are starting to close positions, for example, winning buy or losing sell. We also know that the number of traders willing to continue buying is decreasing. So what? Most likely, the market will move lower. Similarly, we can say that if prices are falling and the volume and open interest are falling, the most likely is that the price will turn up.

– Price rises, volume, and open interest increase. In this case, the number of traders who are confident in the uptrend and who are willing to hold their positions is increasing. We can deduce that the uptrend is reliable and will possibly continue for a time. Similarly, low price and volume rise and open interest: the downtrend is reliable.

– Following the course of time, we can now enter the phase where prices continue to rise, as well as volume and open interest. Now late buyers and early sellers are entering, the market is susceptible to a bearish pullback after which we can find a buying opportunity. In the case of falling prices, there may be a bullish pullback after which there may be a good selling opportunity.

– Finally, let’s talk about the situation in which prices rise, and both volume and open interest decrease. In this case, it can be said that there is no clear direction, that the traders are trading short and long and that the most capitalized traders are probably closing buying positions as the price rises. In this case, a strong downward turn is very likely, very typical when important highs are reached. In the case of falling prices and falling volume and open interest, a strong upward turn is very likely.

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