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  • Open interest and volume of operations

     
     

    The total of a clearing house's outstanding long or short positions is called the open interest.  If a broker who is long in a futures contract sells their position to another trader who wants to be long on futures, the open interest does not change. However, if they sell their position to a trader who is short and is therefore closing out their position, the open interest is reduced. The total size of the open interest indicates the degree of current liquidity on a given market.

    When considering the open interest, it is important to distinguish between the types of operators entering the exchange. The term 'strong hands' describes those who are able to make margin payments over an extended period of time whereas 'weak hands' are operators who cannot easily meet the substantial variation margins demanded whenever prices move significantly.

    In general, strong hands are comparatively resilient to price changes. One type of strong hand is an operator who uses the exchange for hedging purposes. They may want to liquidate a position, not as a result of price movements but because of an opportunity to carry out an operation in physicals. Once the hedging operation has begun they will not be affected by price changes. Another type of strong hand is the speculator who holds large amounts of capital. Such operators can withstand a setback on the market without being forced to sell their positions because they have the financial resources to cover the margins. Small non-professional speculators who generally operate through a broker are considered weak hands because they are more vulnerable to changes in price.

    Looking at prices in isolation can give some indication of whether buyers or sellers are dominating the market, but it will not distinguish new purchases from hedging operations. If new purchases are the predominant activity, it is possible to forecast the continuance of the market's upward trend as these purchases signify that new operators are entering the market in the hope that the market will rise. However, if these purchases are largely for hedging purposes to cover short positions, the market is considered weak because once these short positions are covered the buying pressure will subside.

    Volume of operations 

    The volume of operations, or turnover, is equivalent to the number of trades in all futures contracts for a particular commodity on a given day. Technical analysts regard volume and open interest as indicators of the number of people or weight of interest in the market and thus of the likelihood of a price rise. A gradual increase in volume during a price upturn could suggest a continuation of the trend.

    The rise in volume could also result from an anticipation of higher prices in the future, but, in fact, it may indicate that long or short positions are leaving the market because of a fall in prices. In general, the volume of trade is a good guide to the breadth of the outside support given to a price movement on the market.

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