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Open Interest and Volume
Two very interesting volume figures that helps to gauge the mood of the traders for futures and options. They are
Volume: Volume is total number of shares or contracts traded on any trading day for future or options. The higher the volume the more conviction market has in the direction of the stock. In trending market if stocks moves with volume then it means that trend is strong and similarly if the movement is sudenly reverse with high volume then a reversal is on the cards.
Open Interest (OI): While volume is just the history, stocks future direction is indicated by open Interest. In futures and option world, it is the cumulative open contracts for the stock.
Open Interest = New Open Contracts + Unclosed Contracts - Closed contracts
Important points related to Open Interest
1.Higher Open Interest means more Money is coming in the market.
2.Increase in OI with stock movement in direction of trend means strengthening of trend.
3.If open Interest drops significantly near highs then reversal is signalled.
4.If open interest increase with change in direction of stock, then strong reversal is expected. 5.Breakout with High open Interest means a strong break out.
6.Open Interest acts supporting indicator to other indicators. Increase in open Interest in uptrend signifies strength in the market and decrease in open interest means trend is weakening.
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