Open interest (OI) in the stock market refers to the total number of outstanding or open contracts for a particular futures or options contract. It represents the total number of contracts that have not been settled or offset by delivery or exercise.
The importance of open interest
Open interest is an essential indicator for traders and analysts as it provides insights into market sentiment and the strength of a trend. High open interest suggests active participation in the market and indicates strong investor interest, while low open interest may signal a lack of conviction or fading interest in a particular asset.
What happens when OI increases?
When open interest increases, it suggests new positions are being created in the market, indicating bullishness or bearishness, depending on the direction of the trend. Rising open interest in an uptrend confirms the bullish momentum while increasing open interest in a downtrend validates the bearish sentiment.
What happens when OI decreases?
A decrease in open interest suggests that existing positions are being closed or liquidated, indicating a potential reversal or weakening of the current trend. Declining open interest in an uptrend may signal a loss of momentum, while decreasing open interest in a downtrend may indicate a potential bottoming out of prices.
How to use OI in trading?
Traders use open interest as a confirming indicator in conjunction with price and volume analysis to validate trading signals. High open interest accompanied by increasing prices or volume confirms the strength of the trend, while divergences between open interest and price movements may indicate a potential reversal. Additionally, traders monitor changes in open interest levels relative to previous sessions to gauge market participation and anticipate potential price movements.
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