For each buyer of a futures contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered ‘open’. This article contains weasel words: vague phrasing that often accompanies biased or unverifiable information. Many technical analysts believe that a knowledge of open interest can prove useful toward the donna forex of major market moves.
For some option traders, open interest indicates the intensity of trading in a financial instrument. Technical analysts view increasing open interest as an indication that new money is flowing into the marketplace. From this assumption, one could conclude that the present trend will continue. Analogously, declining open interest implies that the market is liquidating, and suggests that the prevailing price trend is coming to an end. Further, according to the definition of open interest in this entry, a change in open interest indicates a difference in the number of buyers and sellers of a financial instrument, or at a minimum an increase or decrease in the size of participants’ positions.
Like volatility, it has no directional component, it is just a tally of unsettled contracts. If another trader A buys 2 futures contracts from trader B, then the open interest rises to 4. Now, if trader X unwinds his position and the counter party is either Y or B, then the open interest in the system will reduce by that quantity. But if X unwinds his position, and the counter party is a new entrant, say C, then the open interest will remain unchanged.
This is because while X has squared off his position, Y’s position is still open. The level of outstanding positions in the derivatives segment is one of the parameters widely tracked by the market. One complication involved when looking at the overall level of open interest in a futures market is the impact of deliveries. In a physically-delivered commodity, when delivery ultimately takes place the contract that has been delivered is no longer included in the overall open interest tally. This article’s tone or style may not reflect the encyclopedic tone used on Wikipedia. See Wikipedia’s guide to writing better articles for suggestions.