To analyze sentiment of participants in the trading process, it is advisable to use indicators of open interest (OI) in the futures market. OI analysis helps a trader confirm the strength or weakness of an existing trend.
Open interest shows when new money enters the market, indicating that traders are entering more aggressively in the current trend direction. An increase in overall open interest supports the current trend and generally indicates a continuation.
Open interest decreases when traders withdraw money from the market, indicating a change in market pulse, especially if the open interest was rising earlier and started to decline.
In a healthy uptrend or downtrend, open interest should arise. This means that bulls control the market during an uptrend, or bearish shorts dominate a downtrend. Decreasing or flat open interest signals that the trend is weakening and is likely to finish soon.
Open Interest(OI) analysis:
1. OI rises and the price rises: Long. The number of shorts increases, and they will take profits or close their positions (buy), which will push the price up.
2. OI rises, but the price falls: Short. There is a buyer, but soon he will capitulate (sell), which will push the price down.
3. OI goes down, the price goes up: Short coverage. Background for reversal and sell.
4. OI goes down, the price goes down: Long coverage. Ready to buy.
When analyzing open interest, it is necessary to take into account the expiration date, as its change may be associated with the beginning or end of the life of a futures contract.
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