Technicians utilize a three dimensional approach to market analysis which includes a study of price, volume and open interest. Of these three, trading is the most important. However, volume and open interest provide important secondary confirmation of the price action on a chart and often provide a lead indication of an impending change of trend. Interest beginning students of the market these two concepts tend to be somewhat confusing but are very important concepts to understand in- undertaking a thorough analysis of market action. Volume represents the total amount of trading activity or contracts that have changed hands in a given commodity market for a single trading day. The greater the amount of trading during a market session the higher will be the trading volume. As mentioned earlier, a higher volume bar on the chart means that the trading activity was heavier for that day. Another way to look at this, is that the volume represents a measure of intensity or pressure option a price trend. The greater the volume the more we can expect the existing trend to continue rather than reverse. Option believe that volume precedes price, meaning option the loss of upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before presenting open as a reversal in trend on the bar chart. Open Interest is the total number of outstanding contracts that are held by market participants at the end of each day. Where volume measures the pressure or intensity behind a price trend, open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not trading sum of both. Each trade completed on the floor of a futures exchange has an impact upon the level of open interest for that day. For example, if both parties to the trade are initiating a new position one new buyer and one new selleropen interest will increase by one contract. If both traders are closing an existing or old position one old buyer and one old seller open interest will decline by one contract. The third and final possibility is one old trader passing off his position to a new open one old buyer sells to one new buyer. Volume this case the open interest will not change. Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend up, down or sideways will continue. Declining open interest means that the market is liquidating and implies that the trading price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves. A levelling off of steadily increasing open interest following a sustained price advance is often an early warning of the end to an uptrending open bull market. Interest relationship between the prevailing price trend, volume, and open interest can be summarized by the following table. It is important to understand that the commodity price chart only records the data. In itself, it has little value. By monitoring the price trend, volume and open interest the technician is better able to gauge the buying or selling pressure behind volume moves. This information can be used to confirm a price move or warn that trading price move is not to be trusted. This will provide you with valuable information to develop a suitable pricing strategy and an appropriate production-marketing plan for your farming operation. Trend Analysis ] -- [ CONTENTS ] -- interest NEXT: See TradingCharts' Privacy Statement. Glossary Glossary Index A through C D through I J through O P through R S through Z Short Open Short Course Index Volume of Futures Trading What Is Traded? Inside Futures Exchanges The Futures Contract Market Pressures Who Trades Futures? The Clearing House Market News and Analysis Taking A Position Taking Delivery Options on Futures A Safety Net of sorts Learning Center: This educational material is provided courtesy of Keystone Marketing Services, a leader in commodity market training. For more futures market learning opportunities, check out their interactive CDRom training courses. Binary Options Articles TFC Commodity Forum Learn interest Trade Futures Commodity Brokers Directory Contract Specifications. 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Open Interest Analysis in Options - Nifty
Open Interest Analysis in Options - Nifty
5 thoughts on “Option trading volume vs open interest”
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