What is Open Interest

Gauging current market participation, helping traders assess capital flow in and out of contracts

In this article we are exploring open interest, a key metric in futures and options trading. It measures the number of active positions, indicating market activity and liquidity. Unlike overall trading volume, open interest specifically gauges current market participation, helping traders assess capital flow in and out of contracts.

What is Open Interest?

Open interest is referring to the quantity of open futures or options contracts, which can be divided into long and short positions

It is a popular technical indicator used primarily by derivative traders, because the tool applies to futures and options contracts of underlying assets – whether in the stock market or crypto markets. Nevertheless, understanding and tracking open interest can be beneficial for every trader.

Open interest (or OI) tool to track the total number of open positions in a specific contract, like Bitcoin Perpetual Futures. Essentially, open interest measures the amount of trading activity that is currently in participation as opposed to the overall trading volume (which also takes into account closed positions).

This makes it easier to determine whether capital is entering the contract or leaving it. As a result, a lot of traders believe that open interest provides more precise information about the interest and liquidity of a given contract.

Understanding Open Interest

Open interest represents the number of active positions in a derivative market. The quantity of open options contracts that have not expired or closed, or the quantity of futures contracts that traders currently possess. It decreases when more contracts are closed or expired than opened – and increases when more contracts are opened rather than closed, expired.

Opening positions—whether long or short—increase OI, whereas closing positions decrease it. A common misconception is that OI is not the sum of all purchases and sales; rather it is the total number of open contracts, which can include both buy and sell orders. Only when new traders join or previous traders leave the market does OI change.

When trading futures and options, traders often use open interest as one of several data points to gauge how strong a price trend is. An increase in open interest indicates the entry of new contracts, which many analysts interpret as validation of the trend. A decline in OI indicates that traders are getting out of the market, and this trend might be ending soon.

Where To Find Open Interest Data?

Some places to obtain open interest data:

  • CoinGlass

  • CryptoQuant

  • Coinalyze

  • Dune Analytics

  • Deribit Metrics

It's crucial to remember that various sources could display different data, so it is advised to compare several sources.

The Importance of Open Interest

Open interest is a valuable instrument to have in your toolkit since it serves as a precise gauge of market activity. Low open interest indicates a small number of market participants, which raises the expectation of low liquidity. Open interest varies per trading day, or even per trading session, as volatility causes new positions to be opened and closed in rapid succession.

Open interest analysis can be a critical component of successful trading in markets where liquidity can be a challenge, particularly in the options market.

A large number of market participants, including institutions, hedge funds, and regular retail investors, are typically indicated by high open interest. Higher open interest is therefore thought to be better since it indicates more liquidity, which makes buying and selling in the options and futures markets easier.

Overall, especially for options and futures traders, open interest analysis can be a potent technical analysis tool to add to your trading strategy. However, it is not perfect and occasionally prints false signals, just like any other indicator.

Avoid using open interest as a stand-alone strategy and practice risk management. The most profitable traders create trading systems that combine multiple tools, including price action analysis, chart patterns, moving averages, and other market data, and they look for areas where these tools converge.

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