OPEN INTEREST & 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)

Source : theindianstocks.com