
12

4
Volume and Open Interest: How to Use it to Trade More Effectively
Tue, Jun 19 2007, 08:49 GMT
by Jim Wyckoff
TradingEducation.com, LLC
Futures volume and open interest are significant factors to monitor when trading futures, for several reasons. First, let's define the two terms.
Open interest is the total number of futures or options on futures contracts that have not yet been offset or fulfilled by delivery. It is an indicator of the depth or liquidity of a futures market, which influences the ability to buy or sell at or near a given price.
Open interest can be a tricky concept, especially for beginners. In a nutshell, here's how open interest is calculated: If a new buyer (a long) and new seller (a short) enter a trade, open interest increases by one. However, if a trader already holding a long position sells to a new trader wanting to initiate a long position, open interest remains the same. And if a trader holding a long position sells to a trader wanting to get rid of his existing short position, open interest decreases by one.
Volume is the number of transactions in a futures or options on futures contract made during a specified period of time. It is usually recorded for one trading session.
You will want to exercise extra caution when attempting to trade a market with very low volume and open interest--or in other words, an illiquid market. Good and timely fills (order execution) may be hard to obtain. Also, markets with lots of liquidity are less likely to be manipulated by traders.
Most veteran futures traders agree that volume and open interest are "secondary" technical indicators that help confirm other technical signals on the charts. In other words, traders won't base their trading decisions solely on volume or open interest figures, but will instead use them in conjunction with other technical signals, or to help confirm signals.
For example, if there is a big upside price "breakout" in a futures market (or a stock, for that matter) that is accompanied by heavy volume, then that only makes the upside move a stronger trading signal. Also, a big upside move or a move to a new high that is accompanied by light volume makes the move suspect. Big price moves (up or down) accompanied by heavy volume are powerful trading signals. If prices score a new high or new low on lighter volume, then that is an indication a top or bottom may be near or in place. Also, if volume increases on price moves against the existing trend, then that trend may be nearing an end. This is called divergence.
As a general rule, volume should increase as a trend develops. In an uptrend, volume should be heavier on up-days and lighter on down-days within the trend. In a downtrend, volume should be heavier on down-days and lighter on up-days.
Changes in open interest also can be used to help confirm other technical signals. Open interest can help the trader gauge how much new money is flowing into a market, or if money is flowing out of a market. This is helpful when looking at a trending market.
Another general trading rule is that if volume and open interest are increasing, then the trend will probably continue in its present direction--either up or down. And if volume and open interest are declining, this can be interpreted as a signal that the current trend may be about to end.
Here's a difference in open interest, as opposed to volume: Open interest has seasonal tendencies--higher at some times of the year and lower at some times of the year, in many markets. The seasonal average of the open interest is important in analyzing open interest figures. If prices are rising in an uptrend and total open interest is increasing more than its seasonal average (5-year average), new money is considered to be flowing into the market, indicating aggressive new buying, and that is bullish.
However, if prices are rising and open interest is falling by more than its seasonal average, the rally is being caused by the holders of losing short positions liquidating (short covering) and money is leaving the market. This is usually bearish, as the rally will likely fizzle.
The same holds true in a downtrend. Open interest increasing more than its seasonal average on the downmove means new aggressive sellers entering the market, and this is bearish. But if open interest is declining more than the seasonal average on the downmove, then it's likely holders of long positions are liquidating their losing trades (long liquidation), and that the downtrend may be near an end.
Here are two more rules for open interest:
-
Very high open interest at market tops can cause a steep and quick price downturn.
-
Open interest that is building up during a consolidation, or "basing" period, can strengthen the price breakout, when it happens.
Many seasoned traders like to examine the Commodity Futures Trading Commission's (CFTC) "Commitments of Traders" (COT) reports, for changes in open interest and to see what the big speculators and commercial traders are doing. More information on the COT reports is available free at the CFTC's website at www.cftc.gov.
Published on
Tue, Jun 19 2007, 08:49 GMT
TradingEducation.com, LLC
| 5807 Old Pasco Road, Wesley Chapel, FL 33544
http://www.tradingeducation.com/default.asp?Code=TEFXSTREET | info@tradingeducation.com
Legal disclaimer and risk disclosure
All information disseminated to you by TradingEducation.com, LLC (hereinafter “TradingEducation.com”) on or through its website (hereinafter the “Website”), or distributed to you by TradingEducation.com by any other means, comprising such information as articles, commentaries, audio presentations, webinars, eBooks, and newsletters (collectively, the “Information”) is provided for informational and educational purposes only. TradingEducation.com reserves the right to change, alter, delete or modify the Information at any time for any reason without prior notice to you.
TradingEducation.com does not make solicitations, recommendations or offers to buy or sell stocks, futures, commodities, options, Forex, or any other security or investment. TradingEducation.com does not advocate the purchase or sale of any security or investment. The Information should not be construed as investment advice. TradingEducation.com is not a registered investment advisor, commodity trading advisor, broker or broker dealer. Prior to the execution of a securities, commodities, options or Forex trade, you should always consult with your broker or other financial advisor. There is a very high degree of risk involved in trading securities, commodities, futures, options and Forex. Past results of any individual trader written about or referred to in the Information are not indicative of future returns by that trader, and are not indicative of future returns which may be realized by you or others.
TradingEducation.com, and its members, employees, agents, consultants, analysts, representatives, affiliates, subsidiaries, successors and assigns (hereinafter collectively, the "TradingEducation.com Indemnities") assume no responsibility or liability for your trading and investment results. The TradingEducation.com Indemnities are not responsible for any actions taken by you based upon your use of any of the Information. The TradingEducation.com Indemnities may hold positions or interests in any of the markets discussed on the Website. You should not rely solely on the Information, in making any investment or trading decision. Rather, you should do your own independent research in order to allow you to form your own opinion regarding your investments and trading decisions. You should always discuss and/or review your trading strategies and decisions with your broker or other professional advisor. The Information is obtained from sources considered by TradingEducation.com to be reliable, but the accuracy and completeness thereof are not guaranteed. The TradingEducation.com Indemnities shall not be responsible or liable for the truth, accuracy, or otherwise for the Information provided or for errors, mistakes, or omissions therein or for any delays or interruptions of the Information presented on the Website or for whatever cause. You agree to indemnify, release, defend, and hold harmless the TradingEducation.com Indemnities from and against any and all claims, liabilities, losses, causes of actions, costs, lost profits, lost opportunities, indirect, special, incidental, consequential, punitive, or any other damages whatsoever and expenses (including, without limitation, court costs and attorneys' fees) asserted against, resulting from, imposed upon or incurred by any of the TradingEducation.com Indemnities as a result of, or arising out of this Disclaimer and/or your use of the Information. Access to and use of the Website and the Information available on the Website is on an “as-is”, “as available” basis and TradingEducation.com specifically disclaims any representations or warranties, express or implied, including without limitation, any representations or warranties of merchantability or fitness for a particular purpose. The TradingEducation.com Indemnities will not be liable, either jointly or severally, to you or to any other person as a result of your access or use of the Website for indirect, consequential, special, incidental, punitive, or exemplary damages, including, without limitation, lost profits, lost savings and lost revenues (collectively, the “Excluded Damages”), whether or not characterized in negligence, tort, contract, or other theory of liability, even if TradingEducation.com has been advised of the possibility of or could have foreseen any of the Excluded Damages, and irrespective of any failure of an essential purpose of a limited remedy. If any applicable authority holds any portion of this section of this Disclaimer to be unenforceable, then the liability of the TradingEducation.com Indemnities will be limited to the fullest possible extent permitted by applicable law. You agree this paragraph constitutes a conspicuous legend.
If you are located outside of the United States, information that you provide to TradingEducation.com will be sent to the United States. By signing up or registering for any of TradingEducation.com’s Information you consent to your data being sent to the United States.
TradingEducation.com has no responsibility for the accuracy, completeness or availability of information provided by linked websites. Links to external websites do not constitute an endorsement by TradingEducation.com of the sponsors of such sites or the content, products, services, advertising or other promotional materials or information presented on such sites. The links on the Website may provide you with access to other websites where the trading of securities, commodities, futures, options or Forex is possible. TradingEducation.com shall not be responsible or liable with regard to any trading which may be conducted on such linked websites or any other website which may be linked to or from the Website. Information on the websites that are linked to or from the Website comes from a variety of sources. TradingEducation.com does not author, edit or monitor these websites or links. TradingEducation.com shall not be responsible or liable, directly or indirectly, for any damages or loss caused or alleged to be caused by or in connection with use of or reliance on any such content, goods or services available on such external websites. Accessing certain links on the Website may provide you with access to other websites for which TradingEducation.com assumes no responsibility of any kind for the content, availability or otherwise.
The Information is the property of TradingEducation.com or its licensors and is protected by copyright and other intellectual property laws. TradingEducation.com is the owner and/or authorized user of any trademark, registered trademark and/or servicemark appearing on the Website, and is the copyright owner or licensee of the Information on the Website, unless otherwise indicated. If you make any use of the Information, except as provided for in this Disclaimer, you may violate copyright and other laws of the United States, other countries, as well as applicable state laws and may be subject to liability for such unauthorized use. TradingEducation.com does not grant any license or other authorization to you of its trademarks, registered trademarks, servicemarks, other copyrighted or copyrightable material or any other intellectual property including all Information, by including them on the Website.
You are being granted a non-exclusive, non-transferable limited license that may be revoked at any time. You may display or print the Information for your personal, non-commercial use only. No portion of the Information may be reproduced in whole or in part without the prior written consent of TradingEducation.com. You are not allowed to sell, publish, distribute, retransmit or otherwise provide access to the Information to any third party. You can not create abstracts from, or display headlines or excerpts from, the Information for use on another website or service. You can not post any Information from the Website to newsgroups, mail lists or electronic bulletin boards, without TradingEducation.com’s prior written consent. TradingEducation.com reserves the right to terminate or restrict your access to the Website and its Information if, in its opinion, your use of the Website may violate any laws, infringe upon another person's or entity’s rights or violate any of the Terms and Conditions of this Disclaimer. TradingEducation.com may deny you future access to all or part of the Information without prior notice if you engage in any conduct or activities that TradingEducation.com, in its sole discretion, believes violate any of these Terms and Conditions, violates the rights of TradingEducation.com, or are otherwise inappropriate for continued access. By navigating the Website and viewing or downloading any of the Information presented on the Website or distributed to you by TradingEducation.com in any manner, you represent that you have read and understand this Disclaimer and agree to be bound by all of the Terms and Conditions contained herein.
Related reports
Weekly Market Commentary - Fed, BOE and ECB kept rates on hold by Mizuho Corporate Bank
Fri, Nov 6 2009, 15:45 GMT
Czech: CNB stays on hold despite dovish signal from its new forecast by KBC Bank
Fri, Nov 6 2009, 11:08 GMT
Market Session Recaps - London Session by FOREX.com
Fri, Nov 6 2009, 11:03 GMT
Technical analysis: EuroDollar Futures - Eurodollar Future – March 2010 by Mizuho Corporate Bank
Fri, Nov 6 2009, 09:08 GMT
Today's Trading Signals by Financial Trend Analysis
Fri, Nov 6 2009, 08:40 GMT
futures, interestrate
View All
Related content
ECB keeps its Refi Rate unchanged at 1.0%; EUR/USD holds above 1.4870
FXstreet.com | Thu, Nov 5 2009, 12:47 GMT
Czech Ctrl Bk Leaves Interest Rates Unchanged As Expected
Dow Jones | Thu, Nov 5 2009, 12:15 GMT
Bank Of England Raises Bond-Buying Program To GBP200B
Dow Jones | Thu, Nov 5 2009, 12:05 GMT
CURRENCIES: Dollar Dips Further As Fed Commits To Low Rates
Dow Jones | Wed, Nov 4 2009, 20:57 GMT
Forex: Dollar rises against the Yen after the FOMC decided to leave rates unchanged
FXstreet.com | Wed, Nov 4 2009, 19:33 GMT
futures, interestrate
View All
The Advisor Weblog » Are you watching?
Fri, Oct 2 2009, 13:37 GMT
Trade Setups » Aug 6th ‘09 | GBP and EURO Interest rates & US NFP Tomorrow
Thu, Aug 6 2009, 10:14 GMT
FX Market Readings » Expected market moves for BOE interest rate announcement time
Fri, Jul 10 2009, 01:30 GMT
Forex Trading Today » RBA Holds The Cash Rate As Price Remains Rangebound
Tue, Jul 7 2009, 07:16 GMT
Forex Trading Today » It’s Hot Here, so Let’s Go for a Surf!
Mon, Jun 29 2009, 01:34 GMT
futures, interestrate
View All