Using Open Interest for Intraday Trading

Intraday trading can be described as trading that takes place in one day. It is self-explanatory. Open interest is one of the most important concepts that intraday traders must understand.

What is open interest?

Open interest (OI) simply means the sum of all outstanding contract numbers at the close of each trading day. These are open positions, which are still to be closed. The open interest measure the market's overall activity. The open interest rises by one contract every time two parties (i.e. the buyer or the seller) create a new position. The open interest decreases by one contract if the traders close the position. The open interest is not affected if the seller or buyer sells their position to another buyer or seller.

If the OI is higher, it indicates that money is being injected into the market. If the OI falls, it indicates that the current price trend may be ending. The OI can be used to indicate price trends that are changing.

What is volume?

Open interest is not the same thing as volume, traders need to understand this. Volume is the number of contracts that are traded per day. Volume refers to the number of transactions that took place between buyer and seller, regardless of whether there has been a transaction or a new contract. OI and volume are different in that open interest refers to the number of open and active contracts, while volume refers to how many have been executed.

Price Action , and its role

Price action is another parameter to be aware of when discussing OI. In trading terms, price action refers to the movement of the price of a security over time on a graph. It is the price trend for a security's upward or downward.

To analyze the market, traders often use volume to calculate OI and price. It is generally accepted that a market is strong if the price is rising and the volume is up. However, the market is weak if it has a falling price and the volume and OI are both rising. This chart will help you understand the rules of open interest and volume.

For traders, these are some tips on how to use OI to monitor market performance:

• If the OI is in an upward trend and price action is also showing an upward trend, this means that there is an infusion of capital into the market. This means that there are buyers, and the market is bullish.
• Money may be leaving the market if the OI drops but the price movement is up. This indicates bearish market.
• If the price drops sharply and OI is high, this still indicates that the market is bearish. Because those who bought at top seem to be losing. In such a situation, panic selling is possible.
• If prices are falling and the OI is dropping, this means that holders are being pressured to sell their shares. This could indicate a bearish market. This could also indicate that selling is likely to peak soon.

Takeaways

OI, in conclusion, is important because it indicates how many contracts are currently open or closed. OI rises when new contracts are added. The open interest drops when a contract has been squared off. Open interest is often referred to as volume. Volume indicates how many trades were executed on any given day. It does not carry over to the next day. OI on the other side has implications for the next day and is therefore live data.

Intraday traders can use open interest, price, and volume information to help them understand the market's position. This information gives intraday traders an indication of the bullishness or bearishness of the market.