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Volume and Open Interest

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Volume and Open Interest

Volume and open interest are measures to gauge the liquidity of a futures market. This is important as trades can be executed and entered into positions faster if the market is more liquid.

Volume

In futures trading, volume indicates the total amount of contracts or the total count of trades of contracts that have been traded for the day. A higher volume signifies a greater amount of contracts being traded. Volume is usually represented on the chart as a bar or candlestick.

One way we can interpret volume of trading is that volume represents the pressure or intensity behind a price trend. We can expect the price trend to continue if there is a greater volume being traded.

Traders who favor technical analysis believe that volume will lead the price trend, which means that before the price trend reverses, it will show first in the volume figures.

Open Interest

Open interest is the total number of outstanding contracts held by traders at the end of the day. In other words, it is the number of outstanding contracts that have not been closed or offset for the day.

Open interest thus measures the flow of liquidity into a futures market. By observing the changes of the open interest figures at the end of the day, we can deduce the price trend.

Increasing open interest indicates new cash flow into the futures markets, which will result in continuation of the present trend which could be up or down. Declining open interest indicates the market is liquidating and suggests that the current price trend may reverse.

To summarize the relationship between price trend, volume and open interest, please refer to this illustration.

Price Volume Open Interest Forecast

(Market is strong – trend confirmation)

(Market is weakening – possible trend reversal)

(Market is weak – trend confirmation)

(Market is strengthening – possible trend reversal)

As a futures trader or investor, you must take into account the liquidity of the futures market. In this way, you have a better gauge of the volatility of the market and can adjust your trading strategy or plan accordingly.

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