Open Interest is a helpful tool in analyzing the strength of a price move. There are four main interpretations of Open Interest:
- If price increases and Open Interest increases, then their is strength behind the price move higher.
- If price decreases and Open Interest increases, then their is strength behind the price move lower.
- If price increases and Open Interest decreases, then their is weakness behind the price move higher.
- If price decreases and Open Interest decreases, then their is weakness behind the price move lower.
The chart below of the Dow Jones Industrial Average mini-Dow futures contract illustrates two examples of price increases with corresponding increases in open interest:
In the chart above of the mini-Dow future, there is a strong increase in price with an equally bullish strong increase in open interest.
Notice that after the first sharp run up, open interest decreased during the price retracement. There was not much strength behind the price decrease.
The second strong bullish green candle occured with a sharp increase in open interest, a strong bullish signal that price increases will probably occur in the future.
Analyzing Open Interest is a helpful tool in an options or futures trader's toolbox for determining the strengths and weaknesses of price trends.
