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- The Proper Use of Open Interest for Options Trading Articles
- What is Volume?
- School of Stocks - Reading Option Chain using Volume & OI
- Open Interest Trading Strategy
These traders look to grab the opportunity of market volatility and book profits.
The Proper Use of Open Interest for Options Trading Articles
Most of the traders carry out the intraday trading activity in the futures and options segment. While trading in the futures and options segment it is important to learn and use the data of open interest. By understanding the open interest data, correct decisions can be made in intraday trading. In this article, you will learn about using open interest intraday trading.
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Open interest represents the total number of outstanding contracts held by the market participants at the end of each trading session. Open interest is a measurement of the level of activity in the futures and options market. Open interest in stock increases by a single contract when there is a buy and sell trade by the participant.
When the buyer or seller passes on their position to a new buyer or seller then in such a case there would be no change in the position of open interest.
What is Volume?
When there is an inflow of money, the open interest of the stock will increase and when there is an outflow of money,the open interest of the stock will decrease. Therefore, open interest represents the changing price trend of a stock. To understand the concept of open interest well, it is important to understand the significance of volume. Let us learn about volume in detail. Volume is the number of contracts that buyers and sellers trade among themselves. Volume represents the number of contracts traded in a day. The difference between open interest and volume is that open interest represents the number of open contracts held by the traders whereas volume is the number of contracts executed.
School of Stocks - Reading Option Chain using Volume & OI
The volume and open interest in stock must be monitored together. If the price of the stock is rising along with the rise in the volumes and open interest, it means that the stock is in a strong upward trend. Similarly, if the stock price is rising with open interest and volume declining, it is a sign that the stock will get weaker.
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The above analysis will help the traders in taking the intraday position on the basis of action in price and volume. By correlating the volume and open interest traders can make consistent profits with their trading positions. Let us now learn about how to use open interest in intraday trading. From the above one can learn using the open interest for intraday trading. To learn more about the stock market you may visit Nifty Trading Academy. Suppose the total open interest is falling off and prices are declining.
This theory holds that the price decline is likely being caused by disgruntled long position holders being forced to liquidate their positions. Some technicians view this scenario as a strong position because they think the downtrend will end once all the sellers have sold their positions. According to the theory, high open interest at a market top and a dramatic price fall off should be considered bearish. That means all bulls who bought near the top of the market are now in a loss position.
Their panic to sell keeps the price action under pressure. Other analysts interpret some of these signals quite differently, mostly because they place less value on momentum. In particular, excessive short interest is seen by many as a bullish sign. Short selling is generally unprofitable, particularly after a significant downward movement.
However, naive price chasing often leads less informed speculators to short an asset after a decline. When the market rises, they have to cover. The typical result is a short squeeze followed by a fierce rally. In general, momentum investors are not nearly as good at predicting trend reversals as their contrarian counterparts.
While it is true that there is generally more buying and bullish price action all the way up, that does nothing to help investors decide when to sell. In fact, volume often increases before, during, and after major market tops. Some of the most respected indicators are based on contrarian views. RSI is another useful contrarian technical indicator. There is no need to study a chart for rule-based signals.
If you are a new technician trying to understand the basics, look at many different theories and indicators. What works for some assets and investment styles will not work for others. Look at stocks, bonds, gold, and other commodities and see if a specific indicator works for a particular application. Technical Analysis Basic Education.
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Open Interest Trading Strategy
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Key Takeaways Many technicians believe that volume precedes price. According to this theory, increasing volume and open interest indicate continued movement up or down. If volume and open interest fall, the theory holds that the momentum behind the movement is slowing and the direction of prices will soon reverse. Contrarian analysts interpret some of these signals quite differently, mostly because they place much less value on momentum. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
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