Open Interest and Price Trend
What Is Open Interest?
There are many traders who usually mix up the volume and the concept of open interest. The open interest pertains to the number of entered contracts by a trader, which haven't been offset yet by the delivery or transaction. This implies that the contracts are very much open and its status is outstanding. The open interest of a trader can refer to the position the trader is holding. The open interest increases with a single contract when there is a new purchaser who aims to create a long position that is new and then purchase another contract meanwhile there is a seller on the other end who also opens a short position that is new.
It is very important to remember that the open interest will not increase if there is a recent buyer who purchases from a buyer not new to the trade and wishes to sell since there are no contracts newly made. There is a reduction in the open interest when a trader offsets the position being held. If we add the total of the entire long types of open interests it will always equal the entire short kind of open interest. This means that there is a corresponding seller for each buyer in a single transaction.
Relationship Between Open Interest and Price Trend Generally, open interest usually increases when there is a latest flow of money in the market which implies that speculation is going on in an aggressive way towards the present direction of the market. The new increase in the overall open interest mostly supports the present trend and usually points out a prolonged trend and it will change when there is a change in the market sentiment which has its basis on the flow of recent information that affects the market.
Generally, the entire open interest will likely decrease if the speculators in the market get their money out. This primarily shows an alteration in the general sentiment specifically when open interest showed an increase before the change.
For another downtrend or an uptrend the open interest will likely increase and this increase is generally ideal. This means that the longs are in domination when there is uptrend. The shorts dominate when a downtrend occurs. The decrease in the open interest should be treated as a signal or a warning to the market that the present prices lacks solid power and that the money that is entering the forex market is not sufficient enough.
Conclusion It is important to remember as a trader that we can use the futures open interest to determine the present sentiment of the market whether in a currency futures market or in the spot foreign exchange market. The use of this analysis can help a trader confirm the trades we will be doing.