Insights from Volume and Open Interest

Feb 4, 2008: 2:58 PM CST

Traders frequently combine volume studies with price studies and indicators to gather a larger picture of where prices may be headed in the future. But in the futures market, traders can utilize signals from Open Interest in combination with price and volume for and enhanced picture.

Open interest for any futures contract, be it index, agricultural, metal, grains, refers to the total number of contracts that are remaining open, and gives a little more insight than volume numbers itself.

The reading for open interest increases only when a new buyer and a new seller trade which creates an entirely new contract.

We are taught that “volume goes with the trend” and even that “volume precedes price” on occasion. In an uptrend, we expect to see higher volume (and open interest) on up days than on down days.

We also expect to see higher volume (and open interest) on selling days during down trends.

But what signals are generated when these “classic” interpretations result in alternate scenarios?

Here is a table to help us understand these signals more clearly (in order of expectation):


Any other signals, such as price up, volume down, open interest up would have little forecasting or analytical value.

Recall that volume is also related to stops being triggered, which in the futures market, can be greater than that of equities. Due to the leverage, traders must be more willing and able to take their predetermined stops, and cannot give positions more time as they can with equities. Thus, volume readings and price moves may be artificially inflated as a result of one side of the market being “Squeezed” out of their positions.

See if you can assess what’s happening behind the scenes for a picture clearer. Who appears to be buying? Who appears to be selling? Might this move be generated by stops being triggered? Is this NEW money flooding into the market or OLD money exiting?

Also, unlike stocks, futures contracts are theoretically limitless per contract month. This is not the case in equities, which have a limited float.

Even if you are an index ETF or equities only trader, you can combine the signals from volume and open interest on some of the key US Index Futures for a little clearer picture of what may be going on in your favorite index.

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Comments
  • Bevan

    It is great to have this to look out at because we can know what the trend is or the expectation is so it helps us in planning better. I am a newbie so I mostly trade with free money thanks to OctaFX for providing their awesome 8 USD no deposit bonus which I have been using since 4 months and I regularly withdraw 50 USD per month and that too instantly so been aware of these trends is perfect way to improve even further.

  • jignesh27

    this is study is same for option also because price decrease in option the long buildup is going on that particular stike price, open interest also increase . so tell me your view

  • Felix,

    I appreciate your comment! Thank you for your kind words. I'm glad the article has been of benefit to you!

  • Pogman:

    I do use colored volume in all charts I view. It helps me to see the length of the bar in relation to the type of day (up or down). My eyes seem to drift to the wrong bar if all the bars are colored equally. It just gives ease of interpretation, and I've always seen charts that way (that I create).

    While there's no perfect indicator, I'll re-write a quote from Napoleon in Orwell's Animal Farm: "All indicators are equal, but some indicators are more equal than others."

    To me, colored volume bars is far more 'perfect' than the solid colors, but that's just my opinion.

    Thanks.

  • Felix

    One of the best articles I have ever read on your blog.

    Thanks.

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