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  • Relationship between open interest, volume and price

     
     

    The elements of charting must be interpreted together as they are meaningless on their own. When changes in open interest and volume are analysed in conjunction with the price charts, they may indicate several trends, described in the paragraphs that follow.

    When both volume and open interest are expanding against a background of rising prices, a bullish trend on the market is indicated. A rise in open positions is a consequence of the ongoing entry of new long positions and new short positions into the market. However, with every subsequent upward movement in prices, the shorts that previously entered the market will incur worsening losses that will be increasingly difficult to sustain. Eventually, traders with short positions will be forced to buy, which will add more buying pressure to the market.

    A persistent rise in both volume and open interest with prices rising is a good indicator of a bull market. In this scenario more new participants are willing to enter the market on the long side, looking for higher levels. When the volume and open interest start to decline this could be a signal of a trend reversal. As mentioned earlier, for the New York market, the commitment of traders (COT) report, published by the CFTC, www.cftc.gov , yields a great analysis of the opened interest, not only by trader category, but also by weekly change.

    If daily volume and open interest are falling and prices are declining, a bearish trend is confirmed. When there are more sellers than buyers in the market, long positions suffer increasing losses until they are forced into a selling position. Declining volumes together with declining prices in turn mean that it will be some time before the lowest price of this bearish trend is reached.

    An explosion of volume can also signal a turning point in the market if a day's trading at very high price levels is recorded against a very large volume and if subsequent price movements, either up or down, are accompanied by lower levels of volume. This is a good sign that a reversal is imminent. Similarly, a collapse in prices after a severe downtrend, recorded against a high volume, can signal an end to the bearish trend.

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