Intraday trading is a self-explanatory term for trading that takes place during the day. Open interest in intraday trading is one of the concepts that an intraday trader must grasp.
What exactly is “open interest”?
Simply explained, open interest (OI) is the total number of outstanding contracts at the end of each trading day. These are open positions that have yet to be closed.
The open interest in the futures and options market is a measure of overall activity. The open interest increases by one contract every time two participants, namely the buyer and seller, establish a new position. When traders close their positions, the open interest is reduced by one contract. The open interest does not alter if the buyer or seller transfers their position to a new buyer or seller.
If the Open Interest has increased, it indicates that the market is seeing a cash injection. If the Open Interest is decreasing, the present price trend is coming to an end. In this way, the OI functions as a price trend indicator.
What exactly is volume?
Open interest in intraday trading is not the same as volume, something traders should be aware of. The amount of contracts traded in a day is referred to as volume. Regardless of whether a new contract was made or an existing contract was transacted, the volume reflects the number of contracts that have occurred between seller and buyer. The main distinction between open interest and volume is that open interest refers to the number of contracts that are open and active, whereas volume refers to the number of contracts that have been executed.
The role of price action
The price action is another factor to consider when analysing Open Interest. In trading jargon, price action refers to how a security’s price changes over time on a graph. It relates to a security’s price tendency, either upward or downward.
To analyse the market, most traders employ volume in conjunction with Open Interest and price. When the price is rising and the volume and open interest are increasing, the market is considered strong. However, even if the price is growing, if the other two indicators are falling, the market is weak.
Here are some recommendations for using Open Interest in intraday trading to see the market performance if you’re a trader:
– An upward trend in the Open Interest and an upward trend in the price action indicates that the market is seeing an injection of money. It indicates that there are buyers, and hence the market is bullish. Money may be fleeing the market when the price movement is rising but the Open Interest is decreasing. This is a bear market indicator.
– Even if the price drops sharply and the Open Interest is really high, the market outlook remains unfavourable. This is due to the fact that individuals who bought at the top now appear to be losing money. In such a situation, panic selling is a possibility.
– If prices are down and the Open Interest is also falling, it suggests holders are feeling pressured to sell their holdings. This is a negative market indicator. It could also be a sign that sales are about to peak.
In the case of using Open interest in options trading – A high open interest for an option contract indicates that many individuals are interested in it. However, just because a contract has a lot of open interest doesn’t indicate the people trading it are correct about the stock. After all, for every option buyer anticipating one outcome, there is an option seller anticipating a different outcome. As a result, open interest in options trading does not always imply a bullish or negative outlook. One can also use the concept of open interest in futures trading.
Finally, Open Interest is important since it indicates how many contracts are active or open in the market. Open Interest increases as additional contracts are added. The open interest in a contract reduces as it is squared off. Another phrase that is frequently used in connection with open interest is volume. The number of trades executed on any particular day is referred to as volume. However, it does not transfer over to the next day. Open Interest, on the other hand, has ramifications for the following day and is thus current data.